The War on Gold: A Personal Account

“Open up,” demanded a man.

I rose from the breakfast table. It was Sept. 19, 1974. I caught a glimpse of the flashing lights bouncing off the premature frost that clung to our trees.

Three cruisers from the Royal Canadian Mounted Police (RCMP) had converged on our small farm south of Calgary, Canada.

“What the hell is going on?” my father C.V. bellowed from down the hall.

I was 15 and filled with dread, fear and fascination. “The cops are here!”

My old man whipped-open the door. Five RCMP officers and a plainclothes tax agent burst into our home.

At the same moment in Calgary the Mounties and Revenue Canada raided my dad’s offices, his lawyer’s office and his bank branch.

Was my father a kidnapper or a bank robber? Hardly. Yet in the eyes of the government he was something much worse. He was a Libertarian and a gold-bug! Worst of all, he had been buying gold for his United States subscribers at a time when it was illegal for them to own it (more about this in a moment).

That morning agents were hunting down documents on my dad and his newsletter, Myers’ Finance & Energy (MFE). But they couldn’t touch his company, Interpublishing, a bona fide operation in Switzerland paying taxes in Switzerland.

Interpublishing was a legitimate offshore company set up by my dad’s accountants. Interpublishing was not a shell company. In fact it was organized the same way as the Canadian Pacific Railway Company, one of Canada’s oldest and largest public companies.

The Midas Mess
The Mounties were out to get their man. It had to do with Americans buying and owning gold and my dad acting as their agent. This had some in the U.S. Treasury Department very upset.

You see at that time it was illegal for Americans to own gold although most believed the law was unconstitutional, and indeed, the U.S. Treasury had become aware of purchases by U.S. citizens.

Meanwhile gold ownership was fully legal in Canada. So my father had started buying gold for any subscribers that could put cash on the barrelhead; charging only a small commission and storage fee.

C.V. wrote in MFE: “We don’t care if you are Chinese, Burmese, Russian or American. Gold ownership is legal in Canada; put the money on our desk and we will buy you the gold. Your account will be numbered but your corresponding identity will be kept secret in Switzerland.”

After the tax men had recorded every check which had been paid by the Americans for this gold they still did not have the owner’s names. And Washington wanted names.

It turned out they had just the instrument to get them. It’s called blackmail. You see, if the Americans couldn’t come forward to claim their gold it could be held hostage to any assessment the Tax Department might like to issue against my dad.

The hope was that mounting pressure from the gold owners would force my dad and the Swiss company to pay the assessment—right or wrong. My dad said it was like hijacking; the only difference being hijackers held third party lives while the tax men held third party money.

Americans Demand their Gold

Then good fortune shined. U.S. gold ownership became legal on Dec. 31, 1974. This meant that owners could come forward. But it meant much more. For if the claimants identified themselves, the Tax Department, having all the documents and keys, had automatically become the legal custodian to the gold and fully responsible, just as Interpublishing had been, to turn it over to the rightful owners upon demand.

The safety deposit keys and the identification list were sent via Teletype from Switzerland and turned over to the Tax Department. Now the tax men not only had the gold, they had everything, including the responsibility.

At this point they were holding a hot potato. Rentals on safety deposit boxes began coming due. Revenue Canada had to decide if it was going to bill the clients just as Interpublishing had been doing, or if it was going to pay the rentals itself? And what if an owner sent in an order to sell? Was Revenue Canada legally obligated to sell it and forward the check?

Like it or not the tax man was in the gold business.

My father advised all clients to write Revenue Canada demanding that they execute the delivery of their wholly-owned gold post-haste.

The Gold is Freed, the Gold-Bug Imprisoned
Things got pretty hot. The gold owners had to be answered. A huge counting operation was arranged. It included a representative of Interpublishing in Calgary, the company’s lawyers, the Tax Department, officials of the bank and two security guards. All boxes were opened, counted and recorded. In all there was $4 million worth of bullion!

When the count was finished it was found that every claimant’s gold was separately wrapped. Not a coin was missing. None belonged to C.V. Myers or Interpublishing.

Falling prices spurred American owners to action. Through a Calgary law firm they launched an action against Revenue Canada and the individuals they claimed had acted beyond their authority in withholding from them their rightful property.

The deadlock broke in March 1975, when the Supreme Court of Alberta admonished Revenue Canada and ordered the return of each and every ounce of gold to my dad’s clients. No damages were paid: there was not even an apology.

Norman Stone wrote a book about the case titled: Unbridled Bureaucracy in Canada, The Bizarre Case of C.V. Myers.

Stone concluded that Canada’s tax department had acted on orders, not from Ottawa, but from Washington. Furthermore wrote Stone, “The capitulation forced by the court left the taxmen (sic) red-faced, angry and vengeful. Talk among the personnel in the Department was funneled back: Get Myers!”

It didn’t take long. I was finishing up my junior year in high school. The old man and I pulled up to his parking space outside his office in late spring 1975. As we got out of the car door two plainclothes agents blocked his way.

“C.V. Myers?” asked the cop.

“Yes.”

“You are under arrest.”

“What for?”

“For evasion of taxes. I must warn you that you don’t have to speak and anything you say may be used against you.”

The cops cuffed my old man right then and there. I was dumbfounded. As the back door on the cruiser was being closed he yelled to me, “Call my lawyers, I am under arrest and on my way to jail.”

Tale of Two Trials
The charge was evasion on $1.8 million in income, exactly the same amount which had been assessed Interpublishing eight months before.

Later that day dad got out on $100,000 bail. But the real cost of urging Americans to buy and hold gold was yet to be announced.

Over the next two years my dad would face two trials. In the first one he was fully acquitted. The second case—a trial de nova (double jeopardy, which was later eliminated by the Canadian Constitution) found my dad guilty and sentenced him to two years plus a day. He was given hard time, especially for a man who was in his 70s.

After my mother died my dad stood over her casket. He was weeping softly as he held one of her hands between his handcuffed two. Behind him stood an impatient corrections officer, telling my dad to hurry, that he had to get him back to his prison cell. He led my dad away just as a young girl started singing my mother’s favorite song: Amazing Grace. My 8-year-old nephew began to sob. Our family mourned in quiet devastation.

But all was not lost. Word of the injustice began to spread. For example the late Congressman Larry McDonald and Congressman Ron Paul urged Ottawa to release my father. And there were editorials in the press condemning the sentence and calling my dad a political prisoner. Colleagues like Richard Russell, Harry Schultz and Jim Dines began writing the Prime Minister and Members of Parliament.

After my dad was diagnosed with liver cancer he was released from Bowden Federal Penitentiary. Less than two years later he died in Loma Linda, Calif., a free but broken man.

Gold had given my dad a sterling reputation, a loyal following and a small fortune. But in the end he paid a terrible price.

What was done to just one individual illustrates what lengths government will go to shut-up its opponents and enforce its will. I know, I was there; a witness to the war on gold.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

Nero Once Fiddled, Now Obama is Manning the Printing Presses

“To Rome said Nero: ‘If to smoke you turn I shall not cease to fiddle while you burn.’” –Ambrose Bierce

For President Obama it has been a dismal year. He cannot claim victory on even a single one of his big four agendas: healthcare, the economy, the war or the environment. It seems for every step forward the Obama administration has taken two steps back.

Before you agree to wholeheartedly embrace this rumbling disaster, take note that Obama’s failures, even if they extend just another three years, are the nation’s failures and there will be consequences thrust upon us all.

Meanwhile Obama’s approval ratings continue to tank. At the crucial 100-day mark of his presidency in April 2009, 63 percent of those polled believed the President had accomplished a “great deal.” His overall approval rating, according to Real Clear Politics’ RCP Average, now stands at 49.6 percent, with 44.9 percent saying they disapprove.

With confidence in the leadership evaporating, the economy is gingerly perched on a precipice. At the same time the stock market has lost its upward momentum and could be susceptible to another crash.

“Despite the rebound of the stock market and the return to huge bonuses on Wall Street, most Americans remain mired in debt and millions of them are living in depression-like conditions,” says The Star.com. “The economy has come back far enough to reassure the wealthy and the corporate elites that things ought to return to pre-crash ways and that there is no need for radical measures of the kind they were prepared to accept during the great bailouts a year ago.”

The economy is so weak that one adult in eight and one child in four needs food stamps. Wall Street has so far ignored the three-legged table that is our economy, but perhaps not much longer.

Bear Still on the Prowl
In January the Federal Reserve reported that commercial real estate losses could reach 45 percent this year. The result of this is $1.5 trillion in commercial loans that could default.

It gets worse. Option adjustable rate mortgages have a gun at their head, with $29 billion recast higher at the end of 2009, followed by another $67 billion in 2010. Barclays Capital announced, “We expect 81% of the option ARMs originated in 2007 to default.”

If you want to know how fast this will sink Big Board stocks ask yourself this—how long does it take a gaggle of money managers to say, “Titanic?”

To date Wall Street is bragging about corporate earnings that “are not as bad as expected” and my favorite, “lower than expected” inflation. Whatever happened to the days of Ronald Reagan and Paul Volcker when any inflation was bad? That inflation could be worse is like your doctor telling you that your cancer is spreading, but cheer up… it’s not spreading as fast as he anticipated.

The Obama administration has been very good at only two things: expanding the breadth of the federal government and increasing the amount of dollars.

“What we don’t know yet is… whether we have big government or small government; they’re more interested in whether we have a smart, effective government,” said the President just before his inauguration.

So far so bad says the January/February issue of The Atlantic in its cover story. “A business organization as inflexible at the U.S. Congress would have a major Whale Oil Division; a military unit would be mainly fusiliers and cavalry,” decries the magazine, adding, “The American tragedy of the early 21st Century; a vital and self-renewing culture that attracts the world’s talent; and a governing system that increasingly looks like a joke.”

Part of the problem for the Democrats is that they subscribe to the dogma of Franklin Delano Roosevelt, that big government can dictate prosperity. What they will learn instead is that more money in and of itself is not more wealth.

Rome’s Spectacular Rise and Inflationary Fall
The god emperors of Rome constructed their empire by implementing hard money. It financed the greatest realm the world had ever experienced.

The hard money was paid out to its armies which in turn conquered most of the ancient world. Jack Weatherford explains in his book, The History of Money, “Rome’s fame and glory came from the military and from conquest, and their riches, too, derived much more from the achievements of the army than from those of the merchants.”

As long as Rome’s legions conquered new lands, the empire thrived. But each new occupation required ever greater resources. Around 130 B.C., Rome occupied the kingdom of Pergamum. In a few years, Rome’s spending doubled from 25 million denarri (a Roman silver coin) to 50 million.

By 63 B.C., the budget grew to 75 million denarri, and spending was beginning to spin out of control. Vast strategic ambitions and social expenditures were beginning to mount.

When Augustus siezed the throne Rome was at its apex, spending rose to an astonishing 250 million denarri or 10 times what it had been 60 years earlier.

By the time the Empire had conquered Europe the cost of its army vastly exceeded the treasure it was repatriating.

Yet spending continued to climb even as revenues declined. Sound familiar?

A string of emperors grasped at an immediate solution. They began to re-mint new money with less and less silver in it.

To pay for the rebuilding of Rome after it burned Nero reduced the silver content in the denarri by a whopping 90 percent! Before long confidence in Roman money began to collapse. Eventually the Empire imploded, crushed beneath its weighty ambitions, with a mountain of debt and a debased currency.

The New Romans
President Obama and the Federal Reserve have a much easier time of opting for inflation than Nero did. Our leaders don’t have to re-mint debased coins or even overwork printing presses. Instead they can create money out of thin air with a keystroke.

Last summer the Wall Street Journal wrote that the U.S. government has been, “flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear… The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.”

The problem is that the Obama/Bernanke bull can’t last. The creation of money is a zero sum game and alone it does not revive a fundamentally weak economy. And unless the economy itself improves—beginning with greater confidence in the dollar—the stock market is bound for a serious fall.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

The Deep Truth About Oil and the Gulf of Mexico

In the time it takes you to read this story Americans will have gulped down 200,000 barrels of oil. From that total 120,000 barrels will have been imported, much of it from the Persian Gulf; a region that harbors a growing hatred of the United States.

This helps explain why Big Oil is making its last stand hundreds of miles out in some very deep waters.

Consider Chevron Corp., the world’s fifth largest publicly traded oil company. It is operating an oil platform in 4,300 feet of water far out in the Gulf of Mexico. It’s called the Clear Leader, and aboard it sunburned roughnecks are drilling through nearly five miles of ocean bedrock.

Some 200 miles due south of New Orleans Chevron has spent 10 years and a whopping $2.7 billion for this project. This is the cost of running a drill and casing more than 30,000 feet through earth and ocean, the same distance that an airliner flies above the earth.

Deep Gulf Oil Rig Map

Chevron will spend billions more and in the end, even with all the high-tech in the world, there are no guarantees that its deep-water experiment will hit pay-dirt. In fact there is less than a 50/50 chance that Chevron’s latest deep-sea adventure will yield anything. Still Chevron and their brethren don’t have a choice.

The Wall Street Journal sums up the situation: “Big easily tapped oil fields close to shore have become off-limits. Western oil companies have been kicked out of much of the Middle East in recent decades, had assets seized in Venezuela and seen much of the U.S. roped off because of environmental regulations. Their access in Iran is limited by sanctions, in Russia by curbs on foreign investment, in Iraq by violence.”

Remembering the Days of Wine and Rigs
I have never met a group that exudes more bravado than wildcatters explaining their latest project. But over the past decade that kind of confidence in exploration has evaporated. In fact the mood in meccas like Calgary and Dallas has turned downright dour. The industry understands that the conventional oil opportunities are drying up.

To understand what is happening with oil think of a bell curve. On the upside of the curve, as production is increasing, exploration and production costs are pretty cheap. But after you have hit the top of the curve and are heading down, it gets harder to find oil, and oil that is found costs more to drill and cap.

To understand the importance of being on the downside of the curve, consider that it took 4.5 billion years for the earth to give us 2 trillion barrels of oil. Since 1886, when the first well was capped, we have used up half of all our inheritance. We have long since past peak discovery rates and in 2008 we hit peak oil production.

The Micro and Macro Economics of Oil
For a specific oil field the key event is not when it runs dry, but the period after production peaks. It is at that time that the field yields less and each barrel pumped costs more.

It is the same dynamic that is working at a global scale. What jars prices higher is not when the oil runs dry, but after oil production has peaked, especially as demand and population are rising.

Consider that world per capita oil production topped out in 1979 and has been in decline ever since. The peak in volume of total world oil production is upon us even as the demand for oil is increasing rapidly.

Globally, petroleum discovery rates peaked during Ed Sullivan’s heyday. In fact, from 1960 to 1980, 600 billion barrels of oil were found. Since 1990 fewer than 250 billion barrels have been discovered.

Despite all our technology and knowledge, the industry is finding oil at less than half the rate of 50 years ago. And the oil people I’ve spoken to believe that less than 100 billion barrels will be discovered this decade.

To understand just how bad this imbalance is, consider that for every new barrel of oil we find the world will consume eight barrels. When my father was publishing OilWeek Magazine 50 years ago that ratio was just the opposite.

Just as individual wells within a field peak at different times, so do different regions of the world. The dilemma that the Obama administration faces, and the real reason the U.S. is embedded in the Middle East, is that U.S. oil production peaked three decades ago and has been in decline ever since. We are pumping less than 5 million barrels per day, or half as much oil as the nation produced when Jimmy Carter gave his fireside chats (see U.S. Oil Production Chart).

U.S. Oil Production Chart

The Persian Gulf has become the epicenter for petroleum as the once rich oil veins in Mexico and the North Sea bleed dry.

The only land with substantial conventional oil reserves is in the Middle East. Iran, Iraq, Saudi Arabia and Kuwait hold nearly two-thirds of the world’s oil and nearly all of the world’s remaining cheap oil.

What do I mean by cheap oil? Compare Ghawar—a single mega-elephant field in Saudi Arabia—to the deep waters in the Gulf of Mexico. Both have billions of barrels of oil. But it costs $2 per barrel to pump oil out of Ghawar while it costs more than $15 per barrel to deliver oil from the Gulf.

"A lot of people can get the very easy oil," says George Kirkland, Chevron’s vice chairman. "There’s just not a lot of it left."

As the once-rich fields in the Americas and North Sea are depleted, the U.S. becomes more and more dependent on Middle East oil.

While the amount of oil available may be shrinking, the world’s need for it clearly isn’t. China’s and India’s demand for petroleum continues to rise even in the face of a global recession.

Outlook for Oil
As I mentioned in my Forecast for 2010, energy prices may pause at these levels. Oil has already recovered above $80 per barrel. That’s more than twice as high as it traded 13 months ago. The truth is oil would be back above $100 per barrel except for lingering fears of deflation.

However it is beginning to look like the Bernanke bailouts will offset a depression. But I have to tell you, I wake up anxious each weekday morning and the first thing I do is check the business channel. I can’t seem to shake the feeling that another shoe may drop. Still, I am cautiously optimistic about oil prices and oil stocks.

A Bet worth Taking
The Gulf of Mexico won’t change America’s energy woes. It will however enrich investors who buy into the right plays. I think the best opportunity of the group is Anadarko Petroleum Corp. (NYSE, APC, $66.31).

Anadarko is one of the largest independent oil and natural gas exploration and production companies in the world. It has 2.28 billion barrels of oil equivalent in proven reserves.
Anadarko Petroleum Corp. Stock Chart

Anadarko is also the largest independent deepwater producer in the Gulf of Mexico. It has discovered 30 fields in the Gulf and has infrastructure which includes 11 hubs and more than 50 sub-sea wells. This year the company will explore its extensive acreage that has been accumulated in some of the richest regions in the Gulf.

To learn more about Anadarko’s projects in the Gulf of Mexico, you can go to the company’s fact sheet here.

I like the leverage we get with Anadarko that frankly isn’t available with the large multinationals like Chevron. Anadarko has the properties, technology and expertise to strike it rich in the Gulf and it doesn’t carry all the excess baggage that burdens the multinationals.

Action to take: Call your stock broker and buy Anadarko Petroleum (NYSE, APC) at market.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

America’s Hundred Years War and What it Means for Your Bottom Dollar

A new decade arrived and the world woke up to another round of Islamic extremism.*

Last week President Barack Obama held a White House inquest into the intelligence failures that saw a man try to bring a jet down over Detroit on Christmas day.

Meanwhile the headline being pumped out by the world’s news sources reads: Yemen Jihad!

If Iraq and Afghanistan weren’t bad enough, now we have to worry about Yemen. These are getting to be trying times—especially if you are like me and have to use Google to find exactly where Yemen is.

If there is one thing aplenty these days it is information, and the above map, courtesy of the Internet, shows Yemen at the heel of the Saudi boot. That puts it pretty much at the epicenter of the Muslim world (shaded in green).

Of course, if you yearn for the return of cheap gasoline you will notice that Yemen is also dangerously close to the House of Saud and its elephant oilfields.

So what, you say? Yemen is just one more speed-bump in America’s 21st Century Autobahn.

Perhaps, but take note that the speed-bumps are starting to pile up, and if the idea of another Hundred Years War seems ridiculous, consider that the United States has already been fighting Muslim extremists since Oct. 23, 1983. On that day an organization calling itself the Islamic Jihad blew-up a Marine Corps barracks in Lebanon killing 299 U.S. servicemen. We have had to live with Islam and the radicals in it ever since.

More than a trillion dollars waged so far
All these years the U.S. has been involved in costly warfare in places like Kuwait, Somalia, Bosnia, Kosovo, Iraq and Afghanistan. And before we engage another enemy that happens to border on our most important strategic ally, Saudi Arabia, we might want to take stock of how successful these operations have been.

According to George Friedman in his new book, The Next 100 Years, A Forecast for the 21st Century: “The (Islamic) world is more fragmented then ever. U.S. defeat or stalemate in Iraq and Afghanistan is the likely outcome, and both wars will appear to have ended badly for the United States.”

One thing is for certain, these wars will have ended expensively.

According to The National Priorities Project, $950 billion dollars has been allocated to the wars in Iraq and Afghanistan. “In addition to this approved amount, the FY2010 budget shows a $130 billion request for more war spending. This would bring total war spending in Iraq and Afghanistan to more than $1 trillion,” The Project states.

In fact, you can check out the accumulating Cost of War Clock at: http://www.nationalpriorities.org/costofwar_home.

It is starting to appear that there is no end in sight for the bleeding of both men and money in this fight. That is at the crux of Washington’s bankrupt foreign policy. Already the war in Iraq alone has exceeded the inflation-adjusted cost of fighting in Vietnam. And that may be a gross underestimation.

The Washington Post says, “By the time you add in the costs hidden in the defense budget, the money we’ll have to spend to help future veterans, and money to refurbish a military whose equipment and materiel have been greatly depleted, the total tab to the federal government will almost surely exceed $1.5 trillion.”

If so, then the U.S. has spent more than $2 trillion in an attempt to re-shape the Muslim world. That is about half of what the U.S. spent in constant dollars to wage and win World War II.

Keep in mind that World War II paid huge dividends to America. It cemented it as the world’s largest superpower and allowed it to shape Western Europe and much of Asia into trade-friendly democracies.

Reconstruction loans and meeting soaring consumer demand from across the Pacific and the Atlantic created an unparrelled boon for U.S. businesses.

Fighting the extremists comes down to oil
Today American conflicts are creating more uncertainty than certainty, greater resentment than goodwill.

So the question resounds: why doesn’t America pick-up and leave the Muslims to themselves? The answer is simple: the U.S. must have future access to Arab oil.

All you have to do is consider the facts:

  • The total remaining conventional oil on the planet is less than 1 trillion barrels. That is about half of the earth’s original endowment.
  • The world is currently burning 80 million barrels per day. At the current rate there will be only enough oil to sustain the planet another 3 decades.
  • America makes up less than 5 percent of the world’s population but consumes more than 25 percent of the world’s oil. This is an especially bleak equation when you consider that the last conventional elephant oilfield in North America was discovered more than four decades ago.
  • The plum but so far undiscovered oilfields in the world lay beneath the shifting sands of the Middle East.

Unfortunately war expenditures, as well as a bevy of social spending (a.k.a. bailouts) by Washington, are putting a noose around the dollar’s neck. Our federal government has put us in harm’s way of not only Muslim extremists, but also a mounting debt crisis—a combination that could cripple the greenback and send oil prices soaring.

Terrible decade for the dollar
As the U.S. Dollar Index graph below shows, the greenback has been falling at a steady rate since 9/11.

In 2001 the U.S. dollar was trading at 120 against a basket of other currencies. Since then it has been spiraling down, the only interruption was during the economic crisis in late 2008 which spawned deflationary fears and created only temporary reprieve for the buck.

But having failed at that rally the dollar is testing historic lows. Technically a break under 72—not all that far below current levels—could be catastrophic for the dollar.

To date the Pentagon seems to have not learned a single lesson from Vietnam. More than a generation later, war planners and politicians are still unwilling to do whatever it takes—yes even the nuclear option—to kill and capture Osama bin Laden and his henchmen. Each failure by the U.S. to end terror against its own people only emboldens the jihadist radicals which include members of Iran and Pakistan’s leadership.

That is bad news for the country and for the greenback.

Action to take: continue to accumulate blue chip petroleum stocks, including holdings in Suncor Energy Corp (NYSE: SU), which is heavily invested in Canada’s oils sands project.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

*Since there was no year zero, the second decade of the 21st Century actually begins next January.

Investment Forecast for 2010: The Dollar’s Demise Sets the Table

The air was stifling. It was thick with dust and hung in clouds through the sweltering corridors. I was 7,000 feet deep in a Transvaal gold mine.

Worse than the heat was the noise. I had to yell to my guide, the chief economist for JCI Mines.

I cupped my hands to make a horn, and over the roar of tractor engines and jackhammer drills I yelled: “What do you see for gold next year?”

My Afrikaner escort shouted over the din: “You tell me what the dollar does and I will tell you what gold does!”

It just so happened that the year was 1990 and the U.S. greenback was about to make one of its biggest bull runs ever. The result was a bear market in bullion that took the price of gold all the way down to $252 per ounce.

Today, with the price of gold about $900 higher than it was then, the same question regarding gold in 2010 cuts to the wick: What is the dollar going to do?

An Avalanche of Money
One thing is certain. This is not your father’s Federal Reserve.

The Fed that existed 30 years ago was chaired by Paul Volcker. Volcker was brought in to curb soaring inflation. To do that he decided his first priority was to protect the dollar, recession be damned. At the same time Ronald Reagan was coming into office. He was trying to curb government spending.

As the chart below shows, Volcker jacked the Fed funds rate up to almost 20 percent. In the process the United States endured a great rolling recession that devastated the commodity markets and farmers. Yet for the next two decades the dollar would be the world’s kingpin currency.

With the exception of The Crash of 1987 the U.S. economy was on firm ground, and prosperity was growing.

Then came a speculative stock bubble, 9/11 and runaway deficits.

In the wake of all this are President Obama and Fed Chairman Ben Bernanke who are not squeezing a single thing! Instead they are creating a tsunami of money. It amounts to throwing gasoline on a fire.

In just over a year the Fed has increased our monetary base by a whopping 120 percent! That is more than double the previous highest annual increase over the past 50 years. The Fed has made huge loans to private lenders and bought more than $1 trillion of mortgage securities and hundreds of billions of dollars of long-term Treasury bonds. It has succeeded in lowering the federal funds rate below 1 percent—and even, for most of the time, to less than half that.

Washington is trying to jump-start the economy with unprecedented amounts of money. Yet the old economist adage holds, “It’s like pushing on a string.”

 Unless there is demand for money by willing lenders and borrowers the economy is not going to improve. What is going to happen is a train-wreck for the dollar.

The dollar is more than 14 percent off its March peak, and some worry that additional losses could prompt foreign investors to start selling dollar-denominated assets.

But while a sluggish U.S. recovery and low interest rates mean the dollar may have further to fall in the year ahead, very low inflation means a crisis is far from imminent, said Henry Kaufman, president of Henry Kaufman & Company, Inc.

"There has been no dollar crisis," Kaufman said. "The retreat of the dollar has been gradual, it has been orderly and it has not had an impact on the securities market."

Perhaps so, but as this U.S. Dollar Index chart shows, the greenback is still fading fast in a bear market that began eight years ago. If the dollar continues its slide in 2010, as I think it will, it will break below its 2008 lows of 71.5. When that happens the dollar will be in uncharted territory. Just how far it could slump from here is anybody’s guess, but with offshore investors holding trillions in dollar assets, the dollar’s direction is of critical importance to everyone.

Of course if you want to you can buy a 30-year T-bond today that will pay you a 4.7 percent annual return. Given that the real rate of inflation is at more than five percent, that is a losing proposition.

Now the only reason that Washington has been able to get away with selling such risk for such a miserable return is two-fold:

  1. Nations like China, India, Japan and Germany don’t have another currency to put their surpluses into.
  1. The deflation fears from 2008 still linger, so rather than put money into real estate or real assets, trillions of dollars are being invested in U.S. Treasuries.

But disgruntlement among lenders is growing quickly, leaving the U.S. bond market ripe for a collapse. Last month Treasuries fell, with the gap in yields between 2-year and 30-year securities reaching its widest margin since 1980. This means that people holding long-term Treasury bonds want a much larger return than those investing in short-term Treasuries. The reason is simple—long-term confidence in the dollar is evaporating.

Meanwhile the U.S. continues to be a beggar of last resort. To pay for all of President Obama’s plans the government has to auction off hundreds of billions of dollars in U.S. Treasuries this year.

In 2006 the U.S. bond market was worth an estimated $44 trillion. If interest rates rise, as I think they will, trillions of dollars in wealth could disappear. That is not just wealth held by foreigners but by all Americans.

Furthermore, the biggest danger will be the U.S. will have to finance its deficits with additional Treasury debt. To get those loans, interest rates will certainly climb.

Forecast for 2010
Dollar: Look for an even weaker dollar in 2010. The U.S. Dollar Index is close to breaking down and losing all technical support. That could throw traders into frenzy.

Bonds: Expect a smash-up in the bond market as investors are now holding bonds that pay a pittance. To sell off its Treasury debt the Fed is going to be forced to raise interest rates which will throw bond prices into a tailspin. Higher rates will also be a stake in the heart of the…

Stock Market: The Dow Industrials are flirting with 11,000. My expectation is that the Dow may touch upon this level before higher rates drive stock prices lower. Look for the Dow to be under 7,500 by the end of the year. I expect an even worse year for the tech-packed NASDAQ. This year will be a tough year for investors unless they are in real assets, especially…

Precious Metals: Gold continues to shine, although expected profit taking will happen along the way. Washington and other governments would love to keep a cap on the price of bullion, but right now they have much bigger fish to fry. My expectation is that the Midas metal will top $1,500 per ounce before year’s end and silver will rise from the $17 range to $25 per ounce. That leaves us with one other key sector…

Energy: It is going to be a mixed bag for energy this year. In fact, oil could easily fall back toward the $60 per barrel range if interest rates increase enough to choke off the recovery. Still, world demand for oil continues to grow. I think that over the long-term oil prices are headed back toward $150 per barrel. That may not happen, however, until we are closer to 2012.

Well, there you have it… my forecast for 2010. But keep in mind something that the Yankee great, Yogi Berra, said, “Prediction is very hard, especially about the future.”

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

The False Hope of Hi-Tech

“I don’t know if HAL is homicidal, suicidal, neurotic, psychotic, or just plain broken.”
Arthur C. Clark, 2010: Odyssey Two

Ten years ago today the clock was ticking down on Y2K. Many feared a social and economic meltdown; that a programming glitch would throw us into a new Dark Age.

Fast forward one decade. Washington and Wall Street are now betting the bank that technology is America’s savior. Everything seems within reach—more jobs, clean energy, a budget surplus, even a super-bull market.

Technology was not the Antichrist a decade ago, nor is it our savior now. It will not destroy us. Nor will it revolutionize our world. That was the power of innovation a century ago, not today.

Revolution Comes to the Farm

The kid tightened the reins on the right line and then hollered, “Get-up!”
                       
Eight thousand pounds of horseflesh simultaneously hit their heavy collars and the grain wagon started to amble its 10-mile journey to the tiny town of Lomond in Alberta, Canada.

The year was 1927 and that kid was my dad, Vern Myers.

Fifteen years before he had barely survived his birth. He was the family’s first child. His mother lay in agonizing labor for nearly three days. Aided by a local midwife for the first few hours, it became apparent that this was a crisis and required a skilled doctor. The baby’s father, Amil, saddled the fastest horse and headed to Stavely, 40 miles to the west.

These were not the days when one picked up the phone and called 911. There were no paved roads or autos that sped from place to place. The closest hospital was Lethbridge some 70 miles away where the staff consisted of a couple of doctors and half a dozen nurses.

But this time luck was with him. Amil borrowed a friend’s fresh horse. He and the doctor arrived at the lonely homestead shack.

Fifteen years later Vern was holding the lines of four horses on a wagon loaded with 7,680 pounds of the finest milling wheat in the world. He was just starting the first leg of his destination to the rails at Lomond, Calgary, and on to Ontario. There it would be loaded onto ships for Europe.

The grain tank pulled onto the prairie dirt trail and headed east. The kid restrained the eager horses. He knew that soon they would struggle to climb the 300-foot elevation before the trail leveled out. When they reached the top, the horses, with their heaving lungs, required a five-minute rest.

As the Clydesdales recovered Vern heard the strange sound. It was a motor, but it was not from a car. He looked into the lower valley that was hidden from view by the grade that had just been climbed. A cloud of dust rose in the sky. Now he could hear the straining motor and then the monster broke over the top. It was a truck loaded with golden wheat. The vehicle was gaining speed and Vern could hear the driver shifting gears. The truck pulled alongside. It was the neighbor Freddie Noyes. In a flash he was past.

An hour later and four miles further down the road, he noticed a cloud of dust approaching. It was Freddie on his way back home to load more grain.

Vern was just unloading the wagon box in town when again the noise broke the still air. It was Freddie with another load.

Watering his spent horses back at home Vern was amazed. He and Freddie had both started work at the same time. Vern had delivered 125 bushels of grain to the elevator and returned home in just over five hours. Vern had traveled 20 miles.

Freddie had driven 120 miles and delivered 600 bushels in six hours! And Freddie wasn’t one bit tired. In one day the Industrial Revolution had come to the homestead.

Enter the Microchip

In 1990 the boy that saw the truck come to the West died. He had experienced more change during his 78 years than the world had undergone during the previous millennium.

He was born nine years after the Wright Brothers flew at Kitty Hawk. As an old man he would cross the Atlantic in the Concorde at 1.5 times the speed of sound. He had seen the application of indoor plumbing, electricity, the telephone, the television, space flight and even the inception of the Internet.

I took his place as publisher at age 30. I was still in school studying at a university just as computer science was being embraced and I was enthralled by the wonders of the micro chip.

That first year I bought an IBM 386. It was a marvel for the time, with more than twice the memory of its predecessor, the 286. In fact the salesman bragged it could do 11.4 million instructions per second (MIPS)! I didn’t know exactly what that meant, but it sounded impressive.

Today the top-of-the-line computer is a diesel processor Intel Core i7 Extreme. If you ask me it sounds more like a tractor than a computer. I suspected it was a lot faster than my 3-year-old computer and far better than that old 386. But I was shocked at just how much faster it is.

The i7 Extreme lives up to its name; it does 76,000 MIPS which makes it roughly 70,000 times faster than the 386. The Extreme also has 8,000 times more memory! (Author’s note: To you computer aficionados, I did my research and understand that MIPS is a very raw indicator.)

Yet the truth is that all this speed is wasted on me. You see, I use my computer like I once used a typewriter. And unless you are doing something like scientific research or wasting your time playing video games, that computing power is senseless.

This is what MetaFilter (www.metafilter.com) has to say about the revolution of the personal computer when they compared a 1986 Mac Plus to a 2008 AMD Dual Core.

“When we compare strictly common, everyday, basic user tasks between the Mac Plus and the AMD we find remarkable similarities… thus it can be stated that for the majority of simple office uses, the massive advances in technology in the past two decades have brought zero advance in productivity,” said MetaFilter.

Certainly the Net and these super-computers provide a plethora of information. But are we really any better informed? No says Wired Magazine.

According to the June 2007 issue, “More than a decade after the Internet went mainstream, the world’s richest information source hasn’t necessarily made its users any more informed.”

Wired backs up its claim with a 2007 study from the Pew Research Center for the People & the Press that showed that Americans, on average, are less able to correctly answer questions about current events than they were in 1989.

That’s right, Americans who call the Internet their primary news source know less than fans of TV and radio news. It seems that people are more interested in Jessica Simpson than in Jim Lehrer.

A Bankrupt Revolution

The advent of the automobile, the assembly line, the airplane and the telephone revolutionized the American way of life. At the beginning of the 20th Century the United States was seen as a renegade colony. In less than 50 years we became the richest most powerful nation in the world.

By the late 1960s the American dream was within almost everyone’s grasp. Little wonder—the U.S. was the world’s largest manufacturer, creditor and exporter.

But by the 1980s the rest of the world was starting to catch up. Most of us, heck all of us, kept wanting to get more “things.” But now we weren’t earning them.

To get them we started doing something America had never done before—we started borrowing hand-over-fist. The result is we have created a debt crisis the likes of which has never been seen. And most importantly, it’s a calamity that won’t be resolved with even faster and smarter machines.

Yours for real wealth and good health in 2010,

John Myers
Myers’ Energy and Gold Report

P.S. Next week I will look at the debt crisis and what it means for your investments in 2010.

Santa Claus

One Christmas past my eldest son Richard was furious with me.

Since he was old enough to remember, his mother and I had told him about Santa Claus. It seemed like a harmless enough fib.

He loved Santa Claus. Not only was Santa a magical character of mythical proportions, but his very existence—in the eyes of a 7-year-old—meant limitless potential. If he wanted something special, all he had to do was ask Santa Claus.

Of course Santa didn’t always bring everything he wanted; but there was always the prospect that he could, or the hope that next year he would. It was the ultimate fantasy of something for nothing.

Unfortunately Richard’s fairy tale came to an end.

“There really isn’t a Santa Claus, is there Dad?”

It is one thing to perpetuate a myth and another one to outright lie.

“No son,” I said, “Santa Claus isn’t real.”

Disappointment washed over his face. He had to get the truth from his cousin. Mom and Dad couldn’t be trusted. The whole thing, even the milk and cookies set beside the fireplace, were one big lie.

Yet for our 5- and 3-year-olds—Matthew and Sarah—the myth burned on for a few more years. They knew there was a Santa. Mom mailed letters to the North Pole every year, and there were visits to the mall to see Santa himself. Sometimes Santa even brought them exactly what they wanted.

It’s been 20 years since that Christmas and I am starting to wonder if there is a Santa Claus. It is our Federal Government, and this Santa gives the gift that lasts all year.

“If you take the government to be Santa Claus,” says economist Robert Higgs, “you naturally want every day to be Christmas; and the bigger the Santa, the bigger his sack of goodies.”

That sack is certainly getting bountiful. Today the Federal Government is not only the nation’s largest creditor, debtor, lender, employer, consumer and contractor; it is also Santa Claus to tens of millions of Americans.

According to the Brookings Institution and the Urban Institute, roughly 47 percent of Americans either pay no tax or a negative tax (Washington sends money to some people every year through such programs as the Earned Income Tax Credit).

The Federal Government has a long list and lately it hasn’t bothered checking it twice. Since October of 2008 the Federal Government has committed $700 billion and already spent $420 billion through the Emergency Economic Stabilization Act. The Feds have also set aside another $400 billion in separate bailouts to Fannie Mae and Freddie Mac.

For companies like General Motors (GM) and AIG, which have been gifted $50.4 billion and $69.8 billion respectively, there really is a Santa Claus.

If you want to check on all the goodies that Washington has given, there is a detailed list you can see here.

Best of all, Santa wants to see all of his gifts given. On Dec. 8, President Obama unveiled plans to use some of the $200 billion in lower-than-expected spending on troubled bank assets as a fiscal stimulus. Obama claimed his proposal is aimed at alleviating the “continued human tragedy” of unemployment.

Obama said he wants to create “the greatest number of jobs while generating the greatest value for our economy.” And just like Santa, Obama is leaving the price tag off.

What we do know is that the President is calling for an extension of unemployment and health insurance benefits for the more than 15 million out-of-work Americans. According to Obama, boosting jobs—through more government spending—is the best way to tackle the deficit. That kind of deductive reasoning is every bit as magical as Santa Claus.

The list seems endless. Forty billion dollars needed in Afghanistan? Done! One trillion dollars needed for Obamacare? The Democrats are working on that. Meanwhile there is even $1.1 billion for a new agency to protect consumers. And the Greens can count on a stocking-stuffer delivered fresh from Copenhagen.

Bad Santa

There is just one problem. Santa is broke. The budget deficit is a runaway sleigh. For the year ending in September it hit a stunning $1.4 trillion. If that weren’t bad enough, the Congressional Budget Office forecasts a cumulative $9 trillion deficit over the coming decade. When I started in this business in the early 1980s some were issuing dire warnings over Reagan pushing federal debt above the $1 trillion mark. This Christmas it is $12 trillion and climbing.

“No single year’s deficit is any particular danger,” says the Dec. 8 Motley Fool, “but their accumulation quickly becomes lethal. Piling up endless sums of debt works until it doesn’t, at which time a vengeful flock of chickens comes home to roost. Those needing proof can ask Dubai, or simply refer to the recent performance of the U.S. dollar.”

In fact there may be one heck of a Christmas hangover. Moody’s is looking at the debt of both the U.S. and U.K. and might downgrade it from “Triple-A” status.

According to The Wall Street Journal, “Moody’s released the report as part of an effort, spurred by investor demand, to examine the creditworthiness of the world’s most highly rated countries.”

That’s very bad news for Treasury investors. And in the end it may mean the end of Santa Claus. Foreigners hold $3.5 trillion in Treasury debt. If they start unloading even a fraction of this debt the U.S. dollar will crash and the price of gold will soar.

So let me leave you with this Christmas wish; that you buy you and your loved ones some gold. Unlike Santa Claus, it will always be there for you.

Yours for real wealth, good health and, Season’s Greetings,

John Myers
Myers’ Energy and Gold Report

China’s Century: The Impending Threat to America and the Dollar

“India conquered and dominated China culturally for 20 centuries without ever having to send a single soldier across her border”—Hu Shih, 20th Century scholar.

We are a little more than two weeks away from the second decade of the 21st century. More and more it is beginning to look like China’s century.

It’s been 60 years since the Communists seized power. According to Fareed Zakaria, the host of CNN’s Fareed Zakaria’s GPS, “Mao Zedong dragged the country through a series of catastrophic convulsions that destroyed its economic, technological and intellectual capital.”

But in December 1978 Mao’s successor, Deng Xiaoping, gave his famous cat speech which marked the fulcrum upon which the giant nation turned. At a Communist Party meeting he urged economic development over ideology. “It doesn’t matter if it is a black cat or a white cat,” said Deng. “As long as it can catch mice, it is a good cat.”

The question three decades later is what exactly is the Chinese cat hunting? Is it cooperation with the United States and the continued development of the global economy, or is it the relentless pursuit of global power and resource wealth? All the evidence is not yet in, but what we do know seems to indicate the latter with all its chilling ramifications.

But any discussion of China has to be first and foremost about its incredible economy, for the nation has risen towards superpower status in such little time. It is an economy that has doubled every eight years for the past three decades!

Just consider the following:

  • China has foreign exchange reserves totaling almost $2.2 trillion, double the next largest holder, Japan.
  • The number of cars driven in China doubles every three years.
  • China is the world’s largest producer of coal, steel and cement.
  • Twenty of the world’s fastest growing cities are all in China.
  • China manufactures two-thirds of all the world’s photocopiers, microwave ovens, DVD players and shoes.
  • Starbucks predicts that sometime next year it will have more cafes in China than in the U.S.
  • China is the world’s second largest defense spender (behind the USA).

It’s the final item that reveals the claws in China’s carefully crafted Panda Bear self-portrait.

A 2006 U.S. Department of Defense assessment of China was chilling. According to that report the Pentagon viewed China as the next big military threat to the U.S. “There are some real concerns about China’s military modernization,” said Adam Segal, senior fellow for China studies at the Council on Foreign Relations.

Then in 2009 a report from the Council on Foreign Relations said that China has been steadily building up its strategic and conventional capabilities since the 1990s.

According to U.S. defense experts, in 1990 China had a “bare-bones” military: basic capabilities, but nothing sophisticated or top-of-the-line. But two decades of double-digit spending increases have completely changed that picture.

The Pentagon estimates China’s total military spending for 2007 to be between $97 billion and $139 billion, as compared to $52 billion reported by China.

According to the Council on Foreign Relations most of that spending has gone to building a sophisticated, modern military: a large, increasingly capable fleet, an air force stocked with Russian warplanes, and technical strides which have improved China’s ballistic missile arsenal, as well as satellite surveillance, radar and interception capabilities.

“(U.S.) Hawks insist that the Chinese are seeking to drive the U.S. military out of the Pacific, and make it Beijing’s lake rather than what it has been for decades, an American pond,” said Time Magazine in an April 2009 issue.

China is constructing a nuclear aircraft carrier with a lethal and global reach to support its growing fleet of technologically advanced nuclear submarines.

Why is Beijing arming itself to the teeth? Perhaps for global dominance. Perhaps just for the natural resources it needs to sustain its growth: Core among them being oil.

This year Asia will have consumed about 50 percent of Middle East exported oil. China understands it might have to count on its military to lock-in future supplies.

That could mean another arms race or worse. That is something the U.S. can ill afford.

Another Golden Empire
China is also arming itself with gold.

According to the China Gold Association, Chinese demand for gold could total more than 16 million ounces this year, up from 12.9 million ounces in 2008.

China has also become the world’s largest gold producer, having surpassed South Africa in 2007.

“China is likely to become the number-one supplier and consumer of gold this year,” said Rozanna Wozniak, investment research manager at the World Gold Council.

On Nov. 31, China’s Economic Information Daily published remarks by a senior Chinese official indicating that Dubai’s debt crisis could be a good opportunity for China to purchase gold and oil assets.

Ji Xiaonan (Chairman of the Supervisory Committee overseeing large state-owned enterprises) was quoted as saying that the Dubai debt crisis "could give China an opportunity to put some of its foreign exchange reserves into gold or oil."

Just two weeks ago Ji Xiaonan said that China should increase the amount of gold it holds in reserves to reduce potential losses from a depreciating dollar. Currently China has relatively small gold reserves, just 1,200 metric tons or about 7 percent of the world total.

But Ji Xiaonan wants to change that. He wants China gold reserves to reach 6,000 metric tons within three-to-five years and possibly to 10,000 metric tons in eight to 10 years. (Ten thousand metric tons represents 350 million ounces of gold or about four years of global gold production.)

Money is Not a Problem
China has a lot of money to invest in gold and other real assets. It has foreign currency holdings of $2 trillion which include $800 billion in U.S. Treasury debt. With that kind of dollar exposure it is little wonder that China wants to increase its gold reserves 10-fold.

This will be an unprecedented national build-up of official gold reserves (in fact for the past 50 years most nations have been net sellers of gold). China’s radical increase in its bullion reserves is likely a harbinger for much higher prices for the Midas metal. How high is anyone’s guess, but I wouldn’t be surprised to see gold above $1,500 by next spring.

Action to take: Don’t be surprised by a correction in the price of gold going into January. I think that over the very short-term the bull is tired. Over the long-term the bull market in gold is very much alive. I recommend you use any correction to add to your physical gold holdings in anticipation of considerably higher prices in 2010.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

Shocking Proof… Global Warming is a Hoax

(Part three of a three-part series on energy.)

“We’re being asked to wage trillions of dollars and substantially curtail freedom on climate models that are imperfect and unproven. (With) the consensus far from being as solid as they say it is, and the debate as over as they say it is.”
George F. Will

In President Nixon’s day, dirty tricksters did things the old fashioned way—with black gloves and flashlights. The result was Watergate, the eventual legacy of which may be that anything corrupt contains a word ending with “gate.”

The latest incident is Climategate. It began about three weeks ago when a computer hacker broke through a server used by the Climatic Research Unit at the University of East Anglia in England.

Unlike Watergate, which started a grand conspiracy, last month’s hacker-heist may unravel one. It appears as if the stolen e-mails reveal collusion by climate scientists to withhold scientific information. Some scientists don’t want the public to know the shocking truth—that the climate is NOT getting warmer.

The hacked e-mails from men and women of science include discussions on how to silence climate change skeptics. The e-mails also discussed how to censure scientists who dare to have contrary views on global warming and included derogatory remarks about climate skeptics. Finally, the e-mails discuss how to prevent actual data from being revealed under the Freedom of Information Act—an action that seems to have little to do with freedom and less to do with information.

For example, after learning that the scientific journal Climate Research had suggested that perhaps the world isn’t burning up, Penn State professor Michael Mann wrote in an e-mail: "I think we have to stop considering Climate Research as a legitimate peer-reviewed journal. Perhaps we should encourage our colleagues in the climate research community to no longer submit to, or cite papers in this journal."

Besides a seeming tendency to write people off in true Stalinist fashion, Mann has made a living writing about the dangers of global warming. He helped build the “hockey stick graph” shown below.

“Remember that this is not an academic exercise,” wrote The Atlantic. “We contemplate outlays of trillions of dollars to fix this supposed problem. Do the scientists involved deserve to be trusted? No. These people are willing to subvert the very methods—notably, peer review—that underwrite the integrity of their discipline.”

But the story gets even better. At the end of November the University of East Anglia admitted losing raw temperature data on which their predictions of global warming are based.

It means that nobody can check basic calculations that supposedly show a long-term rise in temperature for the past 130 years.

With Watergate Nixon gave the old, “The dog ate my homework” excuse. (Actually Nixon’s secretary Rose Mary Woods said she accidentally erased the recording of the president’s meeting with H.R. Haldeman that took place three days after the break-in.)

With Climategate, the University of East Anglia is saying the computer ate the data.

According to the University’s Website: “We do not hold the original raw data but only the value-added (quality controlled and homogenized) data.”

Even if you accept that the University isn’t cooking the books, the environmentalists have a problem. They claim that world temperatures have risen one degree Fahrenheit in the past century. However the starting point—around 1880—was colder than average. Furthermore, the timing of temperature changes does not fit the theory of global warming. Most of the rise came before 1940, or before greenhouse gases were significant.

A Bright Future for this Old Resource

In the end I think global warming will turn out to be more myth than fact. If that’s the case then a lot of alternative energy investors will be tempted to jump-off the windmills they invested in. And as it is demonstrated that fossil fuels are not going to flood the world and kill off all the polar bears, core energy investors should do spectacularly well. In fact, the biggest profits might be in the oldest resource—coal.

Coal-fired power plants account for half of the U.S. electricity supply. More importantly, coal is also America’s most abundant natural resource.

We have seen in the first two parts of this series that we live in a dangerous age—a period where renewable energy technologies have not yet been realized and a time when America is becoming dangerously dependent on Arab oil.

This third part to the series focuses on a tangible solution—coal. In all of its abundance and its utility, coal will power America deep into the 21st Century.

Just last month The Wall Street Journal ran an article titled: Coal Warriors: Why U.S. Coal Producers Could Still Have a Bright Future.

The WSJ stated: “Coal is and will remain a huge part of the electricity mix in the U.S., despite—or perhaps because of—congressional action on energy and the climate.”

The United States — the Saudi Arabia of Coal

The heady days of petroleum in America are far behind us. Over the course of the past 30 years America’s oil imports have surged threefold—from 2.6 million barrels per day (mb/d) to 7.6 mb/d.

The fundamental fact is that the United States and the world are hungry for energy. Consider the following:

  • U.S. demand for all types of energy is expected to increase by 31 percent within 25 years.
  • Electricity demand in the U.S. will grow by at least 40 percent by 2032.

New power generation equal to nearly 300 1,000 megawatt power plants will be needed to meet electricity demand by 2030; as many as half of them will be coal.

Luckily, coal is the one resource the United States has plenty of. The U.S. has the largest coal reserves in the world, just short of 250 billion tons. That is almost the combined reserves of the next two largest reserve countries China and Russia.

In fact, the U.S. is one of the world’s leading exporters of coal, and is expected to ship 65 million tons this year. That total will grow as nations like India and China ramp up their industrial revolutions with King Coal.

Future world demand for electricity is expected to be so strong that Exxon-Mobil is planning on spending a record $25 billion to $30 billion annually over the next five years finding new hydrocarbon deposits.

“The global economy is experiencing a downturn but at Exxon-Mobil we are focused on the long-term,” said Rex Tillerson, the company’s chairman and CEO.

Power up Your Portfolio with Arch Coal

Any conversation about meeting future energy needs must include coal. Even the “greens” realize this. According to left-leaning CNET News, “Coal is a major source of air pollution, mining accidents, and environmental damage. Unfortunately, we can’t live without it.”

The International Energy Agency (IEA) agrees. In its World Energy Outlook, the IEA says global energy demand will surge by 45 percent between now and 2030. The number one resource to meet this demand will be coal.

That makes investing in coal a smart choice, especially when you consider how depressed coal company stock prices have been over the past 15 months.

My favorite blue-chip coal company is Arch Coal Inc (ACI, NYSE).

Arch mines and sells steam and metallurgical coal from surface and underground mines to power plants, steel mills and industrial facilities in the United States. Arch operates 20 active mines and owns some 2.8 billion tons of proven and probable recoverable reserves.

As you can see from this graph, Arch is selling for about $20 or just one-quarter of its 2008 high. The recession and the growing fears over “green” politics, starting inside the White House, make Arch an incredible bargain. Meanwhile the world is slowly learning the truth—that global warming is a hoax perpetrated by the left-wing establishment and a liberal media.

And if that was not enough, the Federal Reserve and the Obama administration continue to expand the U.S. money supply at a shocking and unprecedented rate. You can read more details on this by going to my Nov. 11 column, Obama’s Bear Market: How to Survive and Prosper.

This surge of new money and continued easy credit is certain to lead to excessive inflation and continued dollar devaluation.

Taken as a whole, these factors could result in the doubling of Arch Coal’s price over the next 18 months. That’s something you don’t often get with a large market cap stock. Yet I think we are going to see with Arch.

Action to take: I urge you to buy Arch Coal (ACI, NYSE) at market. Call you stockbroker today.

Yours for real wealth and good health

John Myers
Myers’ Energy and Gold Report

The White Lies About Black Gold

(Part two of a three-part series on energy. Part three will appear Dec. 9)                

“You lie!”                                           
Rep. Joe Wilson during President Barack Obama’s healthcare 2009 speech

It’s one year after Barack Obama’s presidential victory and the winds of winter are beginning to gale. But don’t expect him to give Jimmy Carter-like sweater-clad chats from a chilly Oval Office.

Carter—the first president to warn us about Arab oil dependency three decades ago—is irrelevant to today’s Democrats. Rather than engage the nation about our critical dependence on Middle East oil, Obama and the Democrats have either ignored our energy problems, or worse—outright lied about them.

At the August 2008 Democratic National Convention Obama declared: “I’ll invest 150 billion dollars over the next decade in renewable energy—an investment that will lead to new industries and 5 million new jobs that pay well and can’t ever be outsourced.”

Apparently Obama didn’t feel as “green” after winning the election. Just one day after he reiterated his commitment to renewable fuels in his State of the Union address in January 2009, we were told that the president’s budget cuts would force layoffs at the National Renewable Energy Laboratory.

Then there is Obama’s proclamation made on Oct. 15, 2008, during the presidential debates:

“In 10 years,” said candidate Obama, “we can reduce our dependence so that we no longer have to import oil from the Middle East or Venezuela.”

It’s Called Peak Oil Mr. President
Such comments reveal a president that is either naïve about the energy situation, or is concerned with what is politically expedient. I can’t decide which.

What I do know is that what he says about oil is impossible. And I should know; I have been around petroleum all my life.

My dad was a geologist and oil trader when some of the biggest petro fields in world were struck in the 1950s and 1960s. He became the founder and publisher of OilWeek, a weekly petroleum magazine that counted the Saudi Oil Ministry among its subscribers and which is still published to this day in Calgary, Canada.

I studied geology during the first oil crisis of the 1970s. I graduated from the University of Calgary just as prices were cresting at $36 per barrel—more than 10 times higher than where they had been at the beginning of the decade.

For nearly 30 years I’ve been covering the oil markets and writing about energy. I am certainly not the smartest fellow in and around oil and gas. But I’ve had the good fortune to meet some of the men and women who are.

All would tell you the one truth that I know—that the United States of America is critically dependent on Arab oil.

It is called Peak Oil, and for the U.S. that happened 40 years ago.

Today the U.S. is pumping just 4.9 million barrels of oil per day (mb/d), or just a little more than half of the oil pumped in 1970. In fact the U.S. hasn’t pumped such little oil since the 1940s when Truman was President and our population was half of what it is today.

It is a situation that is going to only get worse as America’s Big Three crude producers—Texas, California and Alaska—are showing major declines.

Nearly half of our domestic crude production comes from these three states. Yet Texas’ oil output has fallen by 57 percent since 1981. California delivers just a little more than half of what it was pumping in 1985 and Alaska, once America’s oil oasis, has had production decline by a whopping two-thirds in the past 20 years.

Why the Bakken Formation is Baloney
One final note about domestic oil production—every time I write about it, I get comments about the Bakken formation.

The Bakken formation is in North Dakota and Montana. A lot of people wanting to sell newsletters and/or penny oil stocks have claimed incredible numbers for the region; some say it holds billions of barrels of oil, others say hundreds of billions of barrels of oil. One promoter even wrote that it had 2 trillion barrels of oil! If true that would mean there is more than twice as much oil below North Dakota rock than what remains in the rest of the world.

The best undertaking of the region was done by the Pittman/Price/LeFever study which estimated the volume of oil at 200 billion to 400 billion barrels. But here is the rub: because of the lower permeability and lower porosity of the formations, only 1 percent of this total is likely to be recovered at an effective cost. In other words we are talking at best 4 billion barrels—about enough oil to keep the U.S. going for five months.

The geology in North Dakota means that the oil is not pooled in elephant fields like Prudhoe Bay in Alaska, Ghawar in Saudi Arabia or Cantarell in Mexico.

Furthermore, meaningful production from the Bakken formation won’t take place for more than a decade. (That’s a similar timeline to bringing new Alaskan oil to market).

According to The Oil Drum, at some point we might have production of 225,000 barrels per day from the Bakken formation, “Which will have only a minor effect on U.S. production or imports.”

To read a detailed geologic analysis of the Bakken formation, go to: http://www.theoildrum.com/node/3868.

Digging Instead of Drilling
So while bragging up the Bakken may sell newsletters, it won’t save America from an impending oil crisis. And make no mistake, one is on the way.

We have some stopgap measures, including opening up new areas as well as horizontal drilling and offshore drilling. But oil magnate T. Boone Pickens estimates that if every possible new technology worked and if drilling restrictions were completely removed, the U.S. would still, “Only squeeze another 2 mb/d in added (annual) production.”

As it stands right now the U.S. is importing more than 13 million barrels of oil every day. That total is going to grow and within the next few years one-third of all our oil may come from the Middle East.

Meanwhile—as we discussed in Clean Energy is Pure Fantasy—alternative energy solutions are decades away from fruition.

However there is a real and reliable energy source just a few hundred miles north of Calgary. It is the oil sands of Alberta and Saskatchewan and it is already a major supplier of crude oil to the U.S.

Over the coming decade its importance will only increase and investors that take a stake in it will continue to earn big profits.

Canada is already the largest supplier of oil to the U.S., exporting 2 mb/d. About 1.3 mb/d come from oil sands. Yet in the next 10 years oil sands production will soar to 3.4 mb/d.

Given the rapid decline of Mexican and Alaskan oil fields over that span, Canada will become America’s energy lynchpin, providing it with 4.2 mb/d, or more oil than what the U.S. will be pumping for itself.
 
Invest in Suncor Energy
I first toured Suncor Energy (NYSE, SU, $36.30) nine years ago and as the editor of Outstanding Investments. I urged my subscribers to buy this stock in April 2001 for $12.69 per share (see Suncor price chart below).

But the story of Suncor dates back further than 2001 and will extend well beyond 2010.

It is Canada’s original oil sands developer, having produced the first barrel of crude oil from the Athabasca oil sands in Alberta in 1967.

Today Suncor is the world’s second largest producer of oil sands crude (after Syncrude Canada Ltd.) and is the only company to currently use both mining and in-situ resource technologies.

A fully integrated company, Suncor upgrades the oil from the oil sands to the level of conventional crude at its upstream facilities and then ships the crude to the company’s refineries east to Ontario and south to Colorado.

In August 2009, Suncor merged with Petro-Canada. The move made it Canada’s largest energy company and the fifth largest North American energy company based on market capitalization (the price of the stock times the number of shares trading, which in Suncor’s case is $57 billion).

Action to Take: Buy Suncor at market. The weakening U.S. dollar and supply constraints on oil will push crude prices higher. Suncor stock will continue to climb alongside rising petroleum prices.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

P.S.—Next time, in the conclusion of this three-part series (which will appear Dec. 9), I will look at one real solution to America’s energy crisis, as well as a down-to-earth stock that will heat up your portfolio.

Clean Energy is Pure Fantasy

(Part one of a three-part series on energy)

Barack Obama must be thrilled with fellow Nobel Prize winner and former Vice President Al Gore and his just-published book, Our Choice, A Plan to Solve the Climate Crisis. In it, Gore sings the liberal refrain that big government can save the world.

Gore, who is making the rounds touting his book this month, argues there are economic as well as political reasons to be green.

"There is a common thread running through the discussion of climate, (national) security, and the economic crisis, and that is our ridiculous dependence on foreign oil and coal," Gore said.

In other words, clean energy will bring us peace, prosperity and respite from that “End of Days” scenario known as global warming.

Gore thinks we can have peace because America will no longer be dependent on Middle East oil. As a result we can pull out of the region lock, stock and no barrel.

That will save hundreds of billions of dollars being spent on Arab oil. Best yet, that money can be invested into clean technologies—a super-grid to capture and transport wind and solar power.

Gore’s vision is for America to become a world leader in clean technology and export it around the world, correcting one last annoyance—our staggering trade deficit.

Gore’s utopia is green. Soon we can sleep easy in our lavish solar homes with our electric cars plugged in.

If it sounds too good to be true there is a reason for that—it is.

Jousting at Windmills
If you have ever been to Palm Springs, Calif., and driven west you can’t help but notice the forest of wind turbines that pockmark the desert landscape.

As we drove along Interstate-10 years ago my wife Angela said, “How come the windmills aren’t turning?”

“No wind,” I said.                       

That sums up the problem with wind power, a system that currently produces about 1 percent of America’s energy needs.

When the wind blows you get electricity but when it doesn’t blow you get nothing. That is because it is impossible with current technology to store alternating current. Direct current wind power can’t be stored in batteries. As a result consumers need redundant power plants.

Then there is a question of cost and space.

Last year in England, former Industry Secretary and current Labour MP John Hutton announced the British government should build a huge array of giant windmills to meet the country’s future energy needs.

The Energy Tribune said Hutton’s plan would literally change the face of Britain. That’s because Hutton wants the government to build 7,000 turbines—or one every half-mile around the entire coast of Britain.

It’s interesting that as much as the greens hate to spoil the environment they embrace wind power. Turbines not only kill tens of thousands of birds but also use up more space per unit of capacity than any other power source. According to the U.S. Department of Energy each wind turbine requires 40 acres.

Physicist Howard Hayden at the University of Connecticut sums up the situation: “Imagine a one-mile swath of wind turbines extending from San Francisco to Los Angeles. That land area would be required to produce as much power around the clock as one large coal, natural gas, or nuclear power station that normally occupies about one square kilometer.”

And wind turbines don‘t come cheap. One commercial 2 megawatt turbine costs about $3 million installed.

According to Senator Lamar Alexander (R-TN), “At a time when America needs large amounts of low-cost reliable power, wind produces puny amounts of high-cost unreliable power. We need lower prices; wind power raises prices.”

The Sun of All Things
My experience with solar power dates back to that time we drove past the motionless windmills. It was the early 1980s and we were buying our first house. The 1970s energy crisis was still lingering and since real estate was cheap in Spokane, Wash., we decided to spend some extra money and buy a brand new solar home.

It was a nice enough berm house if you didn’t mind dirt piled up against the sides and the back of it. As for the solar panels, they collected energy to beat the band in the summer, which was too bad since we didn’t have an air conditioner. As for its use in the winter, we were in the rainy Pacific Northwest so our solar panels were practically useless.

Nearly 30 years later solar power meets about 1 percent of America’s electricity needs. And solar is still an incredibly costly proposition. It costs up to $80,000 to put in solar technology that would meet the electrical demands of a modest home.

Green Econometrics did the math. In a 2007 article they calculated that solar energy is 10 to 20 times more expensive than fossil fuels for power generation (see graph below). You can read the story at: http://greenecon.net/understanding-the-cost-of-solar-energy/energy_economics.html.


Beam Me Up Scotty
To better understand how ridiculous the prospect of solar energy is, consider a press release sent out by Pacific Gas & Electric Corporation (PG&E) (NYSE: PCG) this past spring.

PG&E announced that it had requested approval from the California Public Utilities Commission to enter into a power purchase agreement with Solaren Corp. in Southern California.

Under the plan Solaren would deploy a solar array into space—yes space—to beam an average of 850 gigawatt hours (GWh) for the first year of the term, and 1,700 GWh per year over the remaining term to PG&E customers.

According to Solaren it has even had talks with Lockheed-Martin and Boeing to build the solar plant and the rockets needed to send it into orbit.

All of which prompted Energy & Capital to write: “The press has gushed about the ‘next frontier’ of solar power, which would collect power ‘24 hours a day’ from the far brighter solar radiation available above earth’s atmosphere from a low-orbit. The energy would be transmitted to a receiver based in Fresno, Calif.”

Meanwhile, it was revealed that the Pentagon had done its own study on space-based solar power. Their report said that a $10 billion program could create a measly 10-megawatt pilot satellite.
 
The scale of the PG&E project is out of this world. Their satellite would have to be hundreds of times bigger than the International Space Station, which can barely sustain itself with solar energy.

Just one final detail: nobody—not even a Nobel Prize winner—has yet figured out a technology that will actually transfer the sun’s rays.

The fundamental truth is that we will, for decades longer, continue to rely on fossil fuels.

Next week, in Part Two of this three-part series, I will touch on more earthly problems, including America’s all too real oil crisis and one rock solid industry that will help ease America’s energy pains and earn you gusher-type profits.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

Obama’s Bear Market: How to Survive and Prosper

They say you can just buy just about anything, even love. But the truth is you can only rent a bull market and the lease on this one is about to run out.

After devastating losses that pushed the Dow Jones Industrial Average to 6,440 in early 2009, the Dow broke above 10,000 last month for the first time in 53 weeks. All thanks to President Obama and his bagmen at the Federal Reserve.

You see, President Obama and Federal Reserve Chairman Ben Bernanke have already injected more than $1 trillion in new money.

Part of this has been in the form of bank bailouts. More has been given to Detroit automakers. And finally, Washington has inserted a whopping $850 billion directly into the U.S. banking system. It is this final act that will wreak the greatest havoc on the U.S. stock and bond markets.

When the credit crisis hit last year the Fed began “running the printing presses.” We are talking about the creation of hundreds of billions of dollars, so presses aren’t really running. Instead, the Fed has created all this money with the touch of a key-stroke. Soon this mountain of money will spill over into the economy and the markets.

The graph above shows the Fed’s unprecedented creation of U.S. bank reserves.

In his Nov. 2, column, Robert Murphy of PrisonPlanet.com explained: “The United States has a ‘fractional reserve’ banking system, meaning that if you added up all of the checking account balances for the customers of a given bank, the total amount of deposits would far exceed the amount of cash reserves in the vaults of the bank.”

As a result, said Murphy, all this fresh Fed money will soon be lent out at a multiple. A conservative estimate is five times the amount injected. That means that the $850 billion in new bank reserves will be transformed into more than $4 trillion in new money. That would take M1 money supply from $1.7 trillion to $6 trillion in just the next few years!

To read all of Murphy’s story, click here.

 

Even before the avalanche of new money, M1 has risen 50 percent since January 2001 (see graph M1 Money Supply).

With all this fresh cash on the bank’s books, M1 could easily double to more than $3 trillion in the next two years. That would make M1 money supply almost 10 times higher than it was when Ronald Reagan took office.

We haven’t seen this kind of excess monetary growth since the stagflationary 1970s. It was bad for stocks and bonds then and it will be just as bad for them today.

A Short History of Stagflation
Between 1970 and 1981, M2 money supply tripled. A record amount of liquidity was being injected into the economy by the Fed. But all this money wasn’t helping an economy that was just limping along.

From the beginning of 1971 to the end of 1979 the gross domestic product (GDP) rose by just one-third—from $3.9 trillion to $5.2 trillion (in constant dollars).

As the amount of money in the economy vastly exceeded the goods and services being produced, inflation was inevitable.

The consumer price index for the 1970s rose by a staggering 6.5 percent each year. By 1980 a 1970-dollar that had been stuffed in the mattress would buy you just 52 cents worth of goods and services. It marked the end of dollar stability and the post-war economic boom that fueled a bull market in stocks.

In January 1950, the Dow Jones Industrial Average was under 200. In January 1966, it breached 1,000 for the first time. Over the next few years, the Dow moved sideways, twice testing, but never again breaking above the magic 1,000 point level.

Stocks fell into a funk. Money supplied by the Fed was not producing real gains and the stock market reflected this.

In April 1980, the Dow was trading at 759. That might not seem too bad compared to its 1966 apex, but factor in inflation and the 1980 Dow, measured in 1966 terms, was really trading at $329. In real terms the Dow had lost two-thirds of its value in 14 years.

Bond investors also did poorly. In the late 1970s prices on 30-year Treasury bonds fell more than 25 percent as the yields-to-maturity on the bellwether 30-year Treasury bond climbed from a rate of 7.75 percent in 1977 to 14.7 percent in 1981.

The end result was a massive renunciation of paper as investors began switching out of dollars and buying real assets.

Yet while many Americans lost their savings in Big Board stocks and bonds, some investors made incredible gains in precious metals.

Pitfalls and Profits
I first began investing in gold when I was just a teenager and it was selling for $35 per ounce. I kept that gold until it topped out at $840 and corrected back to the $650 per ounce range. So even though I didn’t get out at the top, I did get an 18-fold profit.

If that sounds like ancient history and something that can’t be repeated, don’t be so sure. Nine years ago last month I started writing Outstanding Investments. I told subscribers then to buy gold, silver and platinum as well as precious metal equities. At the time gold was selling for less than $280 per ounce.

Today bullion is trading back over $1,050 per ounce and I have been bullish on the precious metals throughout the decade. I still believe that bullion prices could very well double in the next two to three years. Given the excess of Obamabucks, I can see gold trading for more than $2,000 per ounce by the end of 2012.

And don’t be surprised to see silver rising to $80 per ounce (versus $17 today) and platinum to more than $3,000 per ounce.

Action to Take

It is imperative that you get out of Big Board stocks and all long-term debt instruments including Treasury notes and bonds. Look for a major correction to come in the Dow, the S&P and the NASDAQ in early 2010. I wouldn’t be surprised to see the markets hit new lows. At the same time, bonds are just as susceptible to huge losses as I expect interest rates to go up. I urge you put your money into cash in the form of three-month T-bills.

A T-bill is simply a short-term debt obligation backed by the full faith and credit of the U.S. government. The key to a bill is that it’s very short-term (and pays an incredibly small interest return). It has a maturity of less than one year and is sold in denominations of $1,000. You can buy maturities of one month, three months or six months. I like the three-months T-bills because you are not locked in very long but you don’t have to constantly roll them over.

Three Ways to Buy T-Bills

  1. Go to your local bank and ask to buy Treasury bills. This may be the easiest option because you already make periodic trips to your bank.
  2. Call your investment broker. Tell him or her that you want to purchase three-month T-bills and roll them overuntil further instructions.
  3. Buy Treasury bills directly from Uncle Sam. The Treasury Direct Website will guide you through this process and give you lots of information as well. You can access that site at: www.treasurydirect.gov.

I also urge you to buy some physical gold. If you are just starting out, I suggest you buy 1-ounce U.S. American Eagle coins as well as 1-ounce Canadian Maple Leaf and South African Krugerrand coins.

—John Myers
Myers’ Energy and Gold Report

PS—Next week I will be writing the first of a two-part series on energy. If you think wind power is the answer to tomorrow’s problems you will want to read Part I. It will include why fanciful presumptions by the Obama administration are, at best, ignorance, and at worst, the purposeful deceit of the American public. In Part II, I will tell you the core truth about America’s dwindling petroleum reserves and I will give you a new energy stock pick that should be in your portfolio.

Let’s Nuke the Environmentalists

Greenpeace is running rampant across Alberta’s oil sands. In the past few weeks, 37 activists have been arrested in a spate of incidents targeting North America’s most important energy resource.

The most recent occurred on Oct. 5 when 19 activists stormed an upgrader in Fort Saskatchewan, Alberta. They tied themselves to equipment which is used to transform heavy oil into gasoline.

The protesters unfurled banners reading “Climate Crime” and “Climate SOS” to draw attention to an industry they say is killing the planet.

In September, two-dozen Greenpeace commandoes kayaked down the Athabasca River to intercept a Suncor bridge where conveyor belts move bitumen into an oil sands upgrader.

But my favorite is the protestors that drove a convoy of pickup trucks into the heart of Shell Oil’s massive open pit mine, halting production.

They came from Edmonton to Fort McMurray, Alberta, a 360-mile round trip. The irony of burning all that gasoline to shut down a facility that helps to provide affordable gasoline was apparently lost on them.

Greenpeace says that it is putting a spotlight on the “climate crimes of the tar sands.”

Meanwhile, trouble is also brewing west of the oil sands in the Peace River region, an area that encompasses the Alberta and British Columbia border. It is here that an eco-terrorist is on the loose. His target is EnCana Corp (NYSE: ECA), which is working the vast unconventional pools of sour gas that lay a mile beneath the countryside.

In the past year he has blown up six sour gas pipelines. EnCana is a preeminent natural gas company in North America. Yet the company is so afraid that the bomber is going to kill himself or somebody else they have posted an Osama bin Laden-like bounty of $1 million for information leading to a conviction. The newspapers are calling it the largest reward in Canadian history.

In a letter to the Dawson Creek Daily News the bomber wrote: “Return the land to what it was before you came every last bit of it… before things get a lot worse for you and your terrorist pals in the oil and gas business.”

The badly handwritten letter sent July 15 insists EnCana cease operations in the area. The bomber also promised to suspend attacks during a three-month grace period so “we can all take a summer vacation.”

All considered the oil patch is lucky to have a lazy terrorist on its hands.

From Elephant Fields to Real Elephants

I can already picture the hate mail, “Myers, not everyone concerned about the environment is a protestor or a bomber!”

True, but a lot of Greens just don’t get it. Let me give you an example.

In the early 90s I went to South Africa to report on the gold mines. There, my Uncle Richard and I joined a tour group. Our guide was an English conservationist.

He told our table how the South African government sold elephant hunting licenses for $20,000 a pop. Traveling with game wardens, hunters gladly paid this fee to stalk single bull elephants.

This, said our tour guide, allowed the South African government to cull the herds, thus preventing mass starvation of the animals. All of the funds were put back into the game parks allowing for their future expansion and the eventual growth of the elephant population.

For one woman in our group, this was too much. Right there in a Johannesburg restaurant she came unhinged. “You sell elephant lives for money!”

Sometimes I can’t help myself and this was one of those times.

I turned to my uncle and said, “What do you think Richard?”

I then explained that in 1957 my father Vern and my Uncle Richard had gone on safari and had in fact bagged an elephant.

I went on to defend Richard with the truth—saying that, in fact, elephants have always been endangered by poachers, not hunters; that licensed hunting had in fact created a windfall for conservation throughout southern Africa.

But there was no convincing the lady from Toronto. Once she knew that Richard had killed an elephant he might as well have murdered a baby. She told him that in her book, killing an elephant was worse than killing a person.

I knew then and there that some environmentalists were downright crazy.

Any lingering doubts were erased by a 1990s PBS program called, Can the Elephants be Saved? It should have been titled, Are the Environmentalists Crazy?

The program NOVA focused on Zimbabwe’s wildlife management, one of the most effective on the continent. In the decades leading up to the 1990s the nation’s elephant herd had doubled to more than 60,000 animals, twice what the Parks Department considered the optimum size for the country. Where there were just 3,000 elephants in the Hwange National Park in 1930, there were more than 20,000 by 1990.

To prevent the Park’s destruction and the mass starvation of thousands of elephants, Zimbabwe game officials would accompany high stake hunters who culled a limited number of elephants with high caliber rifles at short distances. For the Park Service it was a matter of the greater good since elephants could not be moved safely to other game parks.

Every elephant culled was immediately skinned and butchered. A full grown elephant can provide 2,000 pounds of prime meat. Dried, this lifesaving resource remains edible for up to one year and helps sustain some poor black tribes on the fringes of the game parks.

This utilization of elephants not only preserved the park but also the long-term existence of elephants and other game. It also contributed millions of dollars to the Zimbabwe economy—money that was used to expand the national parks, build needed infrastructure and improve the standard of living for the Zimbabwe people.

All for the good, correct? Not according to Cynthia Moss, then and still the head of the Amboseli Elephant Research Project in Kenya.

Moss told NOVA that shooting just one elephant, for whatever reason, is fundamentally wrong.

“I don’t call that conservation. I would rather see no elephants than elephants being culled, and that’s an extreme position I’ve come to hold, just because I think it is morally unjustified to kill elephants,” Moss said.

If that’s not an ideologue what is? I can picture Hitler slamming his fist upon a desk and declaring: “If Germany can’t win the war, it doesn’t deserve to survive!”

In case you think Moss’ outlook has evolved, guess again. In fact you can visit her Website at: http://www.elephant.se/cynthia_moss.php. There, she is asked who had the biggest influence on her life. Her answer: Echo.

If you want to know who Echo is you can see her picture at: http://www.elephant.se/database2.php?elephant_id=51.

The Hard Truth about Crude Oil

Greenpeace demonstrates that when it comes to the environment, it’s not just individuals that are off kilter.

Then there is the Environmental Defense Fund (EDF). Earlier this year the EDF proclaimed: “For about a dime a day (per person), we can solve climate change, invest in a clean energy future, and save billions in imported oil.”

Newsweek, no friend to conservatives, had this response in its April 27, 2009, issue: “(If what the EDF says) sounds too good to be true, it’s because it is.”

Newsweek points out that four-fifths of the world’s and America’s energy comes from fossil fuels—oil, coal, natural gas—which are also the largest source of man-made carbon dioxide (CO2), the main greenhouse gas.

This is a fundamental fact that isn’t going to change for generations, regardless of how many people chain themselves to oil sands sites or blow up pipelines.

Moreover, Alberta’s oil sands will remain the key to meeting America’s growing thirst for oil. Canada already supplies the U.S. with 22 percent of its petroleum, the bulk of which comes from Alberta’s oil sands. That share will climb significantly over the next 20 years as oil sands operations expand, Greenpeace be damned.

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

Unholy Alliance: How China and Iran Threaten Peace and Prosperity—Plus: Your Lucky Charm When it Comes to New Wealth

“The nuclear playing card… would allow Iran to fill a power vacuum in the region and fuel the fires of Islamist movements presently gaining steam in the Arab world.”
The Jerusalem Post Op Ed Page, September 29, 2009.

Oct. 1 marked the 60th anniversary of communist rule in mainland China.

Just four days before the Red Anniversary, China National Petroleum Corp. signed a contract with National Iranian Oil Co. to develop Iran’s massive South Azadegan oilfield.

Azadegan is the world’s largest oilfield discovered in the past 30 years. It has reserves of 42 billion barrels of oil—double the combined oil reserves in all of the United States.

China now owns 70 percent of this elephant oilfield. All that oil in the heart of Iran will go a long way to satisfying China’s unquenchable thirst for petroleum.

Already Iran provides 14 percent of China’s oil demand, but that total will rise sharply as this unholy alliance strengthens.

“China is looking for a landline connection to the Persian Gulf or endeavoring to create a ‘string of pearls’ chain of naval facilities between itself and the Strait of Hormuz,” warns Thomas P. M. Barnett in his just published book, Great Powers, America and the World After Bush.

By 2030 China will be buying 6 million barrels of oil per day from the Persian Gulf. That is twice what the United States is expected to import from the region. A vast amount of China’s Middle Eastern oil will come from Iran.

It is worth noting that just days before the Iran oil buyout, China announced that it will not support increased sanctions on Iran as a way to curb its nuclear program. Surprise, surprise.

In fact the Obama administration has been left begging for Beijing’s diplomatic support on Iran’s nuclear ambitions. Without it, the United States faces the unpleasant task of fighting another Middle East war. But Iran won’t be the push-over that Iraq was.

“Armed with a vast array of anti-ship and long-range missiles, Iran can target U.S. troop positions throughout the Middle East and strike U.S. Navy ships,” wrote Jephraim P. Gundzik in a 2005 Asia Times article.

“Iran can also use its weapons to blockade the Straits of Hormuz through which one-third of the world’s traded oil is shipped. With the help of Beijing and Moscow, Tehran is becoming an increasingly unappealing military target for the U.S.,” concluded Gundzik.

Unappealing? Yes. Unavoidable? Probably not.

Even the Obama administration understands nuke-toting mullahs in Iran will jeopardize peace in the Middle East and America’s economic security.

Saddam All Over Again

Two years ago Cynthia Tucker wrote in The Atlanta Journal-Constitution: “Should (or would) the United States invade a foreign country for its oil?”

“Of course we would,” wrote Tucker. “We’ve already supported coups, sent armies and invaded at least one country to protect our access to petroleum.”

Make that two if you count Kuwait.

Tucker points to former Federal Reserve Chairman Alan Greenspan’s memoirs.

“I’m saddened that it is politically inconvenient to acknowledge what everyone knows—the Iraq war is largely about oil,” wrote Greenspan.

Greenspan, the mother of all doves, even advised the Bush administration to invade Iraq.

"My view is that Saddam, looking over his 30-year history, very clearly was giving evidence of moving toward controlling the Straits of Hormuz, where there are 17, 18, 19 million barrels a day moving through,” Greenspan said.

That invasion was based on unjustified fears that Iraq had weapons of mass destruction. Seven years later it is almost universally understood that Iran is a short time away from building a nuclear warhead, with a ballistic missile system already on the launch pad.

All the while America faces a growing energy crisis. The U.S. is currently pumping less than 5 million barrels of oil per day. The last time the nation pumped such a frugal amount of crude was when Truman was President. Yet the situation is only going to get worse.

In just a decade the U.S. will be importing more than 90 percent of the oil it burns.

A lot of that oil will come from the Middle East; but only if the region is stable and at peace. This is becoming less likely as the revolutionaries in Iran continue to make their nuclear grab. A development which doesn’t seem to cause the least bit of concern to the world’s other superpower, China.

This is because China’s Cadillac economy is backed up by Pinto-like resources. That means that the nation that was enslaved by Mao Zedong will do whatever is necessary to provide oil to its masses, even if it means war.

The lessons of history are not lost on the Chinese. Poor planning by Mao resulted in The Great Chinese Famine. The result of that was 60 million dead Chinese. It’s a mistake the Chinese won’t make again, even if they have to counter the U.S. in a war.

Crude Profits for the Taking

The clock is ticking down on Iran. With China throwing its money and weight behind Tehran, it is certain they won’t bend to the United Nations (UN).

This sets the stage for a preemptive military attack on Iran by the U.S.

Meanwhile Israel remains a wildcard.

Military action by either the U.S. or Israel would quickly push crude oil past $100 per barrel and perhaps as high as $150 per barrel. This would be incredibly damaging to bonds and Big Board stocks.

This Talisman Offers Real Protection

Yet there are steps you can take to protect yourself financially.

One of my favorite petroleum stocks is Talisman Energy Inc. (NYSE:TLM).
 
Talisman passes the Goldilocks test, not too big and not too small. Its market cap of $17.5 billion is a far cry from Exxon Mobil and its $332 billion market cap. But Talisman is big enough to offer plenty of liquidity and it attracts institutional investors. And unlike Exxon Mobil and their multi-national brethren, Talisman is not burdened with downstream oil operations.

Talisman, headquartered just a couple of miles from my office in Calgary, Alberta, offers a ton of leverage to rising oil prices.

Finally Talisman’s properties are far removed from Koran-carrying maniacs. The company drills for and pumps crude oil and natural gas primarily in North America, with some operations in the United Kingdom, Scandinavia and Southeast Asia.

Action to take: Call your stock broker and buy shares in Talisman Energy (NYSE, TLM) at market.

Yours for real wealth and good health,

—John Myers
Myers’ Energy and Gold Report

The Judicial Decline of America and How to Profit from it

“The Boomer generation represents one of the weakest cohorts of politicians America has ever produced.”–Thomas P.M. Barnett, Great Powers, America and the World After Bush.

Mismanagement in Washington is punishing the dollar. Continued incompetence puts all dollar-backed assets at risk.

Meanwhile, gold prices are once again back over $1,000 per ounce. Yet for gold to reach its inflation adjusted 1980 price it would have to trade at $2,500 per ounce. Impossible you say? Not given the current crisis in leadership.

On Sept. 8, at Wakefield High School in Virginia, President Obama gave a speech to students across the country about the importance of their education, and their responsibility as American students to work hard.

Certainly hard work is needed. Two weeks before Obama spoke it was announced that high school students’ performance on last year’s Scholastic Aptitude Test (SAT) college-entrance exam fell yet again.

Average scores for the class of 2009 in reading dropped to 501 from 502, in writing to 493 from 494, while math managed to hold steady at 515. The combined scores are the lowest this decade. Furthermore, these SAT scores follow more than 25 years of trying to improve U.S. education.

"This is a nearly unrelenting tale of woe and disappointment," said Chester E. Finn Jr., president of the Thomas B. Fordham Institute, a Washington, D.C., think tank. "If there’s any good news here, I can’t find it."

In fact the news is dismal. SAT scores have been in an overall decline for almost 40 years. Meanwhile a new wave of nations are producing another generation of smart kids with a global economy itching to buy up their services.

Hopefully the President has not inspired another generation of wanna-be lawyers. America has more than enough of them. In 2007 the American Bar Association (ABA) counted 1,143,358 in all. That is one lawyer for every 265 people, twice the ratio that Germany has and five times as many as France.

It is interesting to note that last year plans for a new generation of nuclear power stations was put on hold by its own inspectors because of a shortage of skilled engineers.

That’s bad news for the lawyers because no new nuclear plants mean no new litigation against nuclear plant designers and owners. Not that there isn’t plenty of work to keep lawyers busy.

The U.S. tort system cost more than $250 billion in 2007. That is up from less than $43 billion in 1980.

In total, tort costs translate to about $850 per man, woman and child. And get this, since 1950 growth in tort costs has exceeded gross domestic product (GDP) growth by an average of 2 percentage points. Even during recessions, Americans spend more in legal costs. It’s too bad you can’t buy shares in the ABA.

This is not to suggest that we are not heavily vested in lawyers. Some of the very “best” of them are running our nation. Today 46 percent of our government branches are in the hands of lawyers. That includes, of course, the President and the First Lady.

A founder of the Constitution, James Madison, understood that the checking of each branch by the other made for a less effective government. Madison wrote that the sacrifice was worth it to prevent tyranny by a government “in the same hands.”

“No political truth is certainly of greater intrinsic value or is stamped with the authority of more enlightened patrons of liberty than that . . . the accumulation of all powers legislative, executive and judiciary in the same hands, whether of one, a few or many, and whether hereditary, self appointed, or elective, may justly be pronounced the very definition of tyranny.” (Federalist No. 47)*

Whether the federal government is tyrannical can be debated, but you don’t need an MBA to see that it is damned inefficient. Last month the Obama Administration announced its estimate for the budget deficit at $1.58 trillion. That is a trillion dollars larger than last year’s deficit and represents the largest percentage share of GDP in more than 60 years.

Why would we expect anything less? If you have ever been on the “clock” with a lawyer you probably realize how much it costs and how little actually gets accomplished.

Now before I get a rash of comments from lawyers, let me say that I am not alone in my criticism. Way back in the February 1987 Ruff Times, Robert Ringer wrote: “I abhor overgeneralizations. Fairness compels me to point out that only 97 percent of the attorneys in the U.S. are lazy, incompetent, negligent and greedy—yet they give the entire profession a bad name.”

The truth is our government is rife with lawyers and they have been doing a rotten job. An even more alarming truth is that they hold our future and our finances in their hands.

Federal Reserve Chairman Ben Bernanke mans the printing press. Despite the recession, new money is pouring into the economy. Since 2000, M2 money supply has more than doubled, rising from $4 trillion to $9.5 trillion.

One of Bernanke’s first speeches was entitled “Deflation: Making Sure It Doesn’t Happen Here.” On that front he is doing one heck of a job.

What people need to fear from the firm of Barack & Bernanke is the unprecedented amount of new money coming on-stream. The creation of all this cash out of thin air will inevitably be inflationary. That impacts the purchasing power of every dollar instrument you own.

You can protect yourself from dollar inflation by owning gold. I recommend you put at least 10 percent of your investment assets in physical gold. I like 1-ounce U.S. American Eagle coins as well as 1-ounce Canadian Maple Leaf and South African Krugerrand coins.

Call your local coin dealer or if you need one, call Asset Strategies International in Rockville, Md., 800-831-0007 or 301-881-8600 or go to www.assetstrategies.com

Yours for real wealth and good health,

John Myers
Myers’ Energy and Gold Report

PS. I will agree with the President that our kids have to get serious about their education. Perhaps they should read Shakespeare. In King Henry VI he wrote: “The first thing we do, let’s kill all the lawyers."

*Footnote: Federalist No. 47 is the 47th paper from the Federalist Papers. Written by Madison, it was published in 1788 under the pseudonym Publius.

Lacking the Resources: The Drain in Real Assets & How to Profit From it

“The Golden Age of American capitalism is over… In the space of half a century it passed from gold, to silver, to paper, and now it is somewhere between plastic and naval lint.” Bill Bonner and Addison Wiggin, The New Empire of Debt.

“The only thing the States is pumping these days is money.” A Calgary-based, multi-national oil executive.

I use to love to ski. But one March morning a couple of years ago it left me feeling pensive and depressed. I stood at the top of Silver Mountain Ski Resort, east of Coeur d’Alene, Idaho, and watched the lower clouds disperse.

I saw how Interstate 90 snaked through Idaho’s once-famous Silver Valley. But that day the only silver I would see was the giant reflective sign that stood over my shoulder.

Fresh snow had only dusted the mountain. Down below the Silver Valley was black and barren, closer to what you would see on the moon than to what you would experience in the Alps.

My research as a metals analyst reminded me that Silver Valley was the only place on earth where more than a billion ounces of silver have been mined. Since 1884 some 1.2 billion ounces of silver have been harvested in Shoshone County.

I left for home in the afternoon and looked at road signs. The towns along the valley proclaim you can revisit the past and see how it was in the days of the silver barons. But with the sun setting the surroundings looked more like they were from the days of the Jurassic than from the days of Hunt and Getty.

The landscape has been dug, drilled, mauled and mined, and whatever silver was in the region has been long since spent. In a way the Silver Valley is a microcosm for America’s over-harvest of its once-bountiful natural resources.

Fifty years ago the United States was the largest producer of oil and a net exporter. Today its number one import is crude oil. Each year the United States spends nearly $300 billion on foreign petroleum. But oil is not the only resource in shortage.

In 2007 five of the 10 fastest growing imports were: nickel (up 47 percent), feedstuff and food-grains (up 34 percent), precious metals (up 34 percent), tin (up 27 percent) and food oils and oilseeds (up 26 percent).

This year the United States will run a trade deficit of about $350 billion. More than 80 percent of that deficit will be for the purchase or raw materials.

Meanwhile America’s insatiable thirst for natural resources has some Canadians nervous.

“Could the U.S. takeover Canada?” asks the Aug. 20, 2009, Vancouver Sun. Perhaps not anytime soon the newspaper says, but there are reasons to be concerned.

The Sun concludes that Canadian politicians will become more protective of this nation’s sovereignty, “if Americans relentlessly continue their unsustainable consumption patterns even as U.S. resources keep on depleting.”

Given the 100-year trend, it is hard to imagine anything else.

America has always been relentless in its consumption of raw materials and it’s hard to see how that will change. The nation’s whole way of life is based on the excessive consumption of oil, land and minerals. It was the harvesting of those resources that made America great and at the same time addicted the country to a resource-intense lifestyle. But now the nation’s resources are running low.

For example, U.S. experienced peak oil production way back in 1970. Since then domestic oil production has been in a steep decline.

Today Canada funnels more than half the 3.4 million barrels of oil it produces daily to the U.S. and provides 82 percent of all U.S. natural gas imports.

Canada also sells a third of its hydroelectricity to U.S. markets and supplies a third of the uranium used in U.S. nuclear power plants.

Water, of course, is another resource soon to be in shortage. Earlier this year, the U.S. Government Accountability Office said at least 36 states are anticipating water shortages within five years. Again, Canada has excess water it can sell to the U.S. (not because Canadians have been better stewards of the land but because Canada has a richer inheritance and one-tenth the population.)

But even Canada does not have the wherewithal to meet all of America’s resource needs, never mind the needs of a thirsting world.

“In the 1960s most countries lived within their ecological resources,” writes guardian.co.uk. “But the latest figures show that today three-quarters of the world’s population live in countries which consume more than they can replenish.”

While Western economies have slowed to a crawl, China’s economy will grow by more than 8 percent this year. Each new day brings tons of new consumption of raw materials—everything from alfalfa to zinc. And as 1.3 billion Chinese continue to satisfy their growing Western tastes for everything from cars to washing machines, the finite supply of natural resources will get smaller and smaller.

According to guardian.co.uk, “The natural resource crisis is proving worse than the global financial crisis. We are using up the earth’s resources very fast; and as a result, we are heading for an ‘ecological credit crunch.'”

That is certainly an exaggeration from the Liberal left. But there is no denying that real assets are getting used up and at a record rate. If you don’t believe me, just look at some commodity price charts. Rising prices reflect growing scarcity or fears of scarcity.

Commodity markets are one of the only true free markets left, and if you ignore them it is at your own peril. Right now the CRB Index tells me that the commodity bull, while wounded in 2008, is very much alive and getting stronger. That means even higher prices for real assets across the board.

Action to take: A conservative but profitable way to play the commodity bull market is with a real asset fund. There are plenty of good real asset funds out there so talk to your stock broker. Just remember, when you invest in a real asset fund you are betting the price of commodities is going to go up. Given the recent weakness in the U.S. dollar and the continued global demand for commodities, I think this is a safe bet.

Yours for real wealth,

John Myers
Myers’ Energy and Gold Report

Living & Damn near Dying with Socialized Medicine

“The reality is that from Canada to Cuba socialized health care’s record is appalling. It’s impossible to tally how many patients die…” Smart Money, July 16, 2007

You can ask me about universal health care. I’ve lived it. I’ve almost died it.

I’m a dual citizen and spent almost equal portions of my adult life in Canada and the United States. Canada has many things going for it and I moved back to Calgary to be where the action is in energy. But it’s a move that almost cost me my life.

I started getting flu-like symptoms on a Sunday last October. I was sluggish and pensive. I had reason to be. I have acute asthma.

As afternoon turned to evening I was having trouble catching my breath. By 7 p.m. I was struggling for air. My wife Angie ordered me to the car and raced me to one of Calgary’s emergency health clinics just down the road. We both knew I might be getting pneumonia, a potential killer for an asthmatic.

It had happened to me once before in Spokane, Wash., and Angie sped me to The Sacred Heart Medical Center. No sooner had I hit the door when two doctors threw me onto a crash cart and a team of five worked to restore my airways. I was then admitted to the hospital for five days. That was in 1992.

Seventeen years later and 500 miles to the north I knew that my chances of surviving weren’t so good.

The clinic I stumbled into last fall was brimming with three dozen patients; many waiting hours to see one doctor who had been at work since 8 that morning. Angie helped me walk to the reception desk and declared to a young woman that I was having trouble breathing.

“Take a number and I will call you when it is your turn,” she said in a cold voice.

Angie protested and said something about my condition being critical.

“Everybody here thinks their condition is critical,” said the girl.

Angie knew that I couldn’t sit and still breathe, so she propped me against a wall and strode into the examining area. Inside there were an assortment of people, some simply needing to get a refill on their prescription, others included junkies just wanting a fix. She had to physically force herself in front of someone entering one of the tiny examining rooms. The Russian doctor listened and helped her walk me to the examining table.

He laid me down and began to administer oxygen before he undertook a frantic search for Ventolin, an emergency drug for asthmatics that was apparently in short supply.

By now I was gasping for air. My bronchi were almost completely swollen shut. I felt myself losing consciousness.

Some time later my eyes opened and I managed a satisfactory breath after the over-wrought doctor slammed adrenaline into my vein. Two hours later, when he finally checked me out to go home (there were no hospital beds available in Calgary that night) he told me in broken English how he thought I was lucky to be alive.

Next month I will go back to that clinic. I will line up and wait two to four hours to get a flu shot; a vaccination that could save my life in a nation with Third World health care.

Canada offers many great things. But someday I will return to my home, the United States. I just hope it is the United States I left and not just another country that has sold out to the siren call of socialism and the mediocrity it brings.

The True Cost of Obamacare
I have no doubt from my own experiences that health care in the United States is better than in Canada. But of course the Obama administration’s single-minded approach to instituting universal health care is about money.

Last June in an ABC special Obama proclaimed, “The status quo is untenable… It is bankrupting families, bankrupting businesses and bankrupting our government at the state and federal level. So we know things are going to have to change.”

What Obama is really saying is that if the government runs things the quality of health care will be just as good as before and the cost of it will be a lot lower. But when was the last time you saw the federal government do a good job of managing anything? Consider that Washington has grown the national debt from $5 trillion in 1995 to almost $12 trillion this year while damn near reprising the Great Depression.

Health policy experts say guaranteeing coverage for all Americans may cost $1.5 trillion over the next 10 years. That is more than double the $634 billion “down payment” the Democrats are trying to sell.

Meanwhile, America will be adding another huge bureaucracy, about the last thing the world’s largest indebted nation needs. If you don’t believe me consider what has happened in Britian.

According to the Aug. 13, 2009 Examiner.Com, “England’s health care program is the third largest employer in the world and their citizens are getting anything but health care.”

To read the entire story click here.

Debt, the Dollar and Your Financial Health
The United States is increasing its national debt at a dizzying pace. Socialized medicine will only accelerate this trend. That is exactly what happened to Canada when universal health care was introduced in 1968. Over the next decade Canada’s national debt soared. In time it had Canadian dollar investors rushing for the exits.

In 1968 the Canadian dollar stood at par with its U.S. counterpart. Fifteen years later the Canadian dollar had lost nearly a third of its value. This period coincided precisely with Pierre Trudeau, Canada’s Prime Minister (1968-1984), whose Liberal government shamelessly socialized Canada.

Yet many Canadians survived and even prospered during the Trudeau years by diversifying out of the Canadian dollar and buying physical gold. From 1971 to 1980 the price of gold in Canadian dollars rose C$35 per ounce to over C$1,000 per ounce!

Action to take: Watching the Obama administration is frighteningly reminiscent of the Trudeau years. And while I can only pray that America doesn’t revert to socialized medicine I can offer sound advice when it comes to your money. Given the current political and economic conditions I urge you to put at least 10 percent of your investible assets in physical gold. I recommend 1-ounce South African Krugerrands, Canadian Maple Leafs or American Eagles. Call your local coin dealer or if you need one, we recommend Asset Strategies International in Rockville, Md., 800-831-0007 or 301-881-8600 or go to www.assetstrategies.com.

Yours for real wealth and good health,

John Myers

Myers’ Energy and Gold Report

Money, Oil and Power

"The Capitalists will sell us the rope with which we will hang them." Vladimir Ilyich Lenin.

China is building itself the world’s largest war chest. Not in tanks, planes or even secret submarines. It has accumulated the largest collection of IOUs in history.

In an age where real politik is of greater import than Otto von Bismarck could ever have imagined, China is positioned to use the once almighty buck against the very nation that gave birth to it—the United States of America.

The U.S. has unprecedented debt and its largest creditor is China. But Beijing has aims on much bigger things than accruing depreciating dollars. Number one among its objectives is access to Middle East oil.

China Zeros in on Middle East

With real gross domestic product growing at a rate of 10 percent per year, China’s need for energy will surge by 150 percent by 2020. To sustain its growth China requires increasing amounts of oil. Its oil consumption grows by almost 8 percent a year, seven times faster than America’s! At the end of the next decade China will consume more oil than the United States.

There is only one place on earth that can meet China’s and America’s demand for oil and that is the Middle East. The region holds two-thirds of the world’s conventional oil reserves, and China is thirsting to control the world’s last remaining rich oil reservoirs.

Some 60 percent of China’s oil imports come from the shifting sands of Arab lands. By 2015 the share of Middle East oil sustaining China will reach 70 percent.

With Mexico’s elephant fields rapidly declining and Canada unable to make up the difference, the United States must also focus its attention on securing Arab oil.

“Where is the oil (of tomorrow) going to come from?” asked future Vice President Dick Cheney in 1999. “The Middle East, with two-thirds of the world’s oil and the lowest cost, is still where the prize ultimately lies."

If Cheney understood the importance of the Middle East a decade ago, we can be certain that Beijing understands it today.

There is no question that China and the U.S. are planning a future powered by Middle East oil. The real question is whether this last bastion of crude can meet the demands of both countries.

“Tensions over oil resources reflect the larger distrust between the sole superpower and the rapidly rising China.” wrote MSNBC a couple of years ago.

History Lesson about Ike and Real Power

If push comes to shove, China may hold the trump card. The reason is its unprecedented leverage over the United States.

The U.S. Treasury is auctioning off $200 billion—yes BILLION—in new debt every week.

“China has an estimated two-thirds of its more than $2 trillion in reserves in dollar assets, including more than $800 billion in Treasuries,” wrote The Wall Street Journal on July 29th.

In less than two years China will have its hands on $1 trillion in liquid U.S. IOUs.

That one country would leverage the debt it held of another for political and economic gain is not unprecedented. In the summer of 1956, England and France hatched a secret plot to re-capture the Suez Canal with force if Egyptian President Nasser nationalized the waterway.

After World War II the ruling elite in London saw the Suez Canal as the Anglo-Saxon expressway to its remaining colonies in North Africa and India. The canal was also taking on new importance.

“In 1948, the Suez Canal was gaining a new role—as the highway not of empire, but of oil…. By 1955, petroleum accounted for half of the canal’s traffic, and, in turn, two thirds of Europe’s oil passed through it,” wrote Daniel Yergin in his bestseller: The Prize: The Epic Quest for Oil, Money, and Power.

That meant the Suez Canal was a potential chokepoint and the most valuable waterway in the world. Not a property to be trusted to Arab hands thought some members in the House of Lords. Key among them: British Prime Minister Anthony Eden.

So when Egypt nationalized the Suez Canal, France and England were putting together a response. In October 1956, British and French forces attacked Egypt. Soon after, British paratroopers hoisted the Union Jack over the Suez Canal.

Eden knew that the U.S. opposed the operation. But he also knew that President Eisenhower would never send American forces into combat against its two closest NATO allies.

The Sun Sets on the British Empire

It turned out Ike didn’t have to. The Eisenhower administration forced a cease-fire on Britain and France without firing a shot. It did it with money.

At the time the U.S. was the world’s largest creditor and one of its biggest borrowers was Great Britain. The U.S. had sustained England through the war and was using the Marshal Plan to help rebuild the nation.

Ike told Secretary of the Treasury George Humphrey to prepare to liquidate U.S. government holdings of British bonds. London was made aware of Ike’s plan.

The Chancellor of the Exchequer Harold Macmillan told Eden that he believed Eisenhower would sell England down the river if British troops did not withdraw immediately. He had an even more pressing message from Macmillan—if London resisted and the Treasury sold its Sterling bonds—England would be bankrupt within a month! The island nation would face a winter without food or oil.

The next day Eden announced a cease fire and evacuated England’s troops from Egypt. He did it without even consulting the French.

For centuries England had been indomitable. Yet, with a phone call, Ike had done what the Spanish Armada, Napoleon’s army and Hitler’s Luftwaffe had all failed to do. He had brought the British Empire to its knees.

England was humiliated. Britain would never again been seen as a world power and its currency, the Pound Sterling, began a freefall which lasted for decades.

As the above chart shows, in 1956 it took almost $3 to buy a British pound. But a long decline in the value of the pound that had started in World War II began in earnest. By the 1970s London no longer had the financial wherewithal to peg the pound to the dollar. By 1985 the pound was trading at par with the buck!

Bond Market Peril

Britain’s and the pound’s decline occurred as America rose to super-power status. Today America finds itself where England was half a century ago—defending its interests, but facing an economic giant in China, a country that does not have the military to dominant but does have the money to dictate their vision.

Last spring the U.S. Treasury market was close to panic when China hinted it might want to diversify out of U.S. government debt. And as an investor you should understand that China doesn’t even have to sell its huge holdings of U.S. Treasuries for the bond market to go into a tailspin.

All it simply has to do is sit out a few Treasury auctions. If that were to happen, market forces would drive up U.S. interest rates. All of which makes today’s political and economic environments very risky for bond holders and potentially lucrative for real asset investors.

Middle East Mayhem Could Push Oil Over $150 per Barrel

The philosopher Jean-Jacques Rousseau once said, “The more things change, the more they stay the same.”

I’ve been thinking about what Rousseau said because I have passed an anniversary of sorts. Thirty-years ago this past spring I was trying desperately to keep my grades up as a junior at the University of Calgary.

One afternoon the sun was beating into our classroom. It was a petroleum-economics class taught by a Frenchman, Dr. Mitra. But that day was unusual because the professor was agitated. This was most strange. The only agitation I had ever seen in that class came from the students who regularly received Cs and Ds from the white smocked, pipe carrying Dr. Mitra.

As the bell rang, Mitra exclaimed: “This thing in Iran… this Khomeini; it changes everything!”

I don’t remember what I thought of this. I was young and selfish, so I probably wondered if it would affect the final I was already cramming for. It turned out that Dr. Mitra was talking about a lot more than a final exam for one of his classes.

It was the late 1970s, the stock market was in crisis, there was a young inexperienced Democrat sitting in the Oval Office and, oh yes, a pop star that some called “The King”, had died prematurely—of a drug overdose in his home, they said.

Sound familiar?

Back to the Future
Years later I think Dr. Mitra was saying the revolution in Iran would permanently change the markets. That nothing in international oil would be as it was before; that the removal of the Shah and a new clerical regime with its Supreme Leader would transform the Middle East.

He was right.

In 1979 the Iranian Revolution sent oil prices soaring. The country’s oil production plummeted drastically to 2.5 million barrels a day. The 1980 Iraqi invasion worsened the situation. In fact, combined production of both countries fell to just 1 million barrels per day compared to 6.5 million barrels in 1978! This lowered the global production by 10 percent, and oil prices rocketed to $36 per barrel.

Today Iran is on the brink of another revolt. America is getting ready to pull out of Iraq, a move that could throw that country into chaos. With violence escalating in both nations—countries that produce 12 million barrels of oil per day, an amount almost equal to what America imports—the ordinances are set for another price explosion.

In fact, there is a growing potential for a new terror to boil-over in the Middle East… a nuclear kind of terror.

Just how close Iran is to having operational nuclear weapons is unclear. But one thing is certain; Israel is taking the threat seriously. Last month former Israeli defence minister Shaul Mofaz told Israeli radio that Iran is a ballistic power close to becoming a nuclear power.

“Iran has undoubtedly passed beyond the point of no return, moving closer to the ultimate nuclear capacity everyday," said Mofaz.

We are talking nuclear missiles in a region that holds two-thirds of the world’s conventional petroleum reserves. It’s enough to give American strategic planners nightmares. It also sets up the biggest potential for oil and gas profits ever. A scenario that I believe will push crude oil past $150 per barrel and natural gas above $8 per 1,000 cubic feet.

Then, on July 10th, Israel issued a direct warning to Iran. It spelled out the catastrophic consequences if it attacks the Jewish state with weapons of mass destruction.

In an interview published last Friday in the Hebrew daily Ha’aretz, Israel’s national security advisor Uzi Arad said Israel must have "tremendously powerful" weapons to deter or retaliate for a nuclear strike.

In other words, touch us and we will wipe you off the map.

To read more of Israel’s sword-first diplomacy, go to: http://www.voanews.com/english/2009-07-10-voa10.cfm.

In 2009 Iran’s Crisis is an Even Bigger Threat

My office sits 20 minutes from Calgary’s core and I try to get downtown as often as I can. Last week I was at the Canadian Unconventional Oil Forum held at one of the city’s fancier hotels. It’s not so much what you hear from the speakers as what you hear at the bar—coffee, juice or otherwise.

I ran into an old university buddy during a break. He heads up a mid-sized oil and gas company that has more than 100 million barrels of proven reserves.

“If there’s trouble with Iran, it’s going to be a real mess,” he said. “Look at Bush and that Iraqi thing. That was about oil. And if this thing in Iran gets out of hand, the U.S. will be in there too. They’ve got no choice.”

I asked him if I could quote him.

“Sure,” he said as he walked back towards the lecture theatre, “just don’t use my name.”

Annual U.S. Field Production of Crude Oil

The fact is America’s fortunes are tied to Iran and the Middle East. Consider this:

  • The United States accounts for less than 4 percent of the world’s oil production but consumes more than 30 percent of world oil supplies.
  • The average oil well in the continental United States pumps less than 300 barrels per day. The average well in Iran produces 10,000 barrels per day.
  • The last elephant oil field (more than a billion barrels) discovered in the United States was in Prudhoe Bay, Alaska in 1968.

In fact, 2009 marks a milestone for the United States. For the first time since World War II, we pumped less than 5 million barrels of oil per day. We pumped almost twice as much oil 30 years ago during the first Iranian crisis.

As Thomas Wolfe said, we can’t go home again

Meanwhile, Iran remains an oil kingpin. It is the de facto leader of OPEC, has the second largest conventional oil reserves in the world and is the world’s fourth largest producer of crude.

Yet in the end maybe Rousseau was wrong, at least in this instance. Things haven’t so much stayed the same, they have gotten worse. And that is bad news for America which lately has only shown talent for one thing—pumping money.

It is however good news for petroleum investors. The first Iranian revolution doubled the price of crude oil. Today, with America so much more dependent on the Middle East and with the stakes so high, the upcoming price spike could be huge, perhaps putting oil above $150 per barrel. Any way you look at it, that’s an A+ for energy investors.

Yours for real wealth,

—John Myers